The State Bank of Pakistan made a surprising move on Monday by cutting the interest rate by 150 basis points to 20.5 percent, ahead of the annual budget announcement. This decision follows a decrease in inflation to a 30-month low of 11.8 percent in May. The Monetary Policy Committee highlighted the positive downturn in inflation and noted the easing of underlying inflationary pressures due to a tight monetary policy stance and fiscal consolidation.
Despite concerns about potential inflation risks from upcoming budget measures and energy price adjustments, the committee emphasized the importance of maintaining a significantly positive real interest rate to guide inflation towards the medium-term target of 5-7 percent. Additionally, the government’s pursuit of an IMF Extended Fund Facility program is expected to bring in financial inflows that will strengthen foreign exchange reserves.
The rate cut decision defied expectations, as most surveys predicted a smaller decline in the key rate. With real GDP growth at a moderate 2.4 percent and improvements in the current account deficit, the SBP remains optimistic about the country’s economic outlook.\
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