Pakistan's central bank cuts key policy rate by 200 basis points to 13%

Pakistan's central bank on Monday further reduced the key policy rate by 200 basis points (bps) to 13 per cent from 15 per cent amid improvement in inflation.

The State Bank of Pakistan (SBP) announced that its Monetary Policy Committee (MPC) decided to cut the policy rate by 200 bps to 13 per cent, effective from December 17, 2024.

It said that the decision was helped by the continued decline in food inflation as well as the phasing out of the impact of the hike in gas tariffs in November 2023. However, it added that core inflation, which stood at 9.7 per cent, was proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile.

The MPC also noted that the current account had remained in surplus for the third consecutive month in October 2024, which, amidst weak financial inflows and substantial official debt repayments, helped increase the foreign exchange of the central bank to around $12 billion.

The committee also said global prices had remained generally favourable, with positive spillovers on domestic inflation and the import bill.

It added that credit to the private sector recorded a noticeable increase, broadly reflecting the impact of ease in financial conditions and banks' efforts to meet the advances-to-deposit ratio (ADR) thresholds.

Though the business community had expected that the reduction would be between 400 to 500 bps to spur economic growth, the policymakers are not in a hurry to gradually reduce the interest rate.

However, it is believed that the rates will be reduced to around 10 per cent or even below to single digit by the end of the current fiscal year in June 2025.

Earlier, the headline inflation rate measured by the Consumer Price Index fell sharply to 4.9 per cent in November, leaving the real interest rate at a highly positive 10 per cent, when measured with the existing rate of 15 per cent.

Already anticipating a rate cut, stocks continued an upward trajectory at the Pakistan Stock Exchange (PSX) where the benchmark KSE-100 index climbed 1867.61 points, or 1.63pc, to stand at 116,169.41 points from the previous close of 114,301.80.