SBP cuts policy rate by 200bps

The State Bank of Pakistan (SBP) announced on Monday a 200 basis points (bps) reduction in its key policy rate, lowering it from 15% to 13%, effective December 17, 2024.

This decision comes amid ongoing discussions about the need for a significant rate cut to stimulate economic activity.

The Monetary Policy Committee (MPC) attributed the rate cut to a continued decline in food inflation and the diminishing effects of the November 2023 gas tariff hike.

However, the SBP noted that core inflation, which remains at 9.7%, continues to be a challenge, with inflation expectations from both consumers and businesses remaining volatile.

In its statement, the MPC highlighted several positive developments. The current account remained in surplus for the third consecutive month in October 2024, contributing to a rise in SBP’s foreign exchange reserves to around $12 billion.

Additionally, global prices remained favorable, which helped reduce domestic inflation and lower the import bill. The private sector also saw a noticeable increase in credit, reflecting the easing of financial conditions.

Financial experts had widely differing views on the expected rate cut. While businesses advocated for a larger reduction of 400 to 500 bps to foster economic growth, analysts had predicted a more conservative cut of 200 to 300 bps.

The decision comes after the headline inflation rate, as measured by the Consumer Price Index (CPI), sharply dropped to 4.9% in November, creating room for the SBP to consider a rate reduction. Despite this, many experts believed the central bank would not reduce the rate to single digits in one move, as called for by some business representatives.

On the Pakistan Stock Exchange (PSX), shares continued to rise in anticipation of the rate cut, with the benchmark KSE-100 index increasing by 1.63%, or 1,867.61 points, to close at 116,169.41.