Pakistan cuts benchmark interest rate for first time in four years

By Faseeh Mangi and Ismail Dilawar

Pakistan’s central bank lowered its benchmark rate by a bigger margin than expected, the first reduction in four years, after consumer prices eased in the South Asian nation.
 

The State Bank of Pakistan reduced the target rate by 150 basis points to 20.50 per cent, compared to a median estimate for a 100 basis point cut. Only two economists predicted the decision. 

“The Committee, on balance, viewed that it is now an appropriate time to reduce the policy rate,” the central bank said in a statement. “The committee noted that the real interest rate still remains significantly positive,which is important to continue guiding inflation to the medium-term target of 5–7 per cent.”

 

The decision comes as inflation slowed more than expected in May, giving room to the central bank to reduce interest rates from its record highs. Consumer prices eased for the fifth straight month as domestic food supplies improved and fuel costs fell. The central bank had kept interest rates at a record 22 per cent since June last year to rein in prices.

Lower rates will help boost demand and support economic recovery. Pakistan aims for a 3.6 per cent expansion in the next fiscal year starting July 1, faster than current year’s 2.4 per cent. Lower policy rates further would also ease pressure on treasury yields and make debt obligations cheaper.

The cut is the start of monetary easing in Pakistan with economists forecasting the key rate dropping to 17.25 per cent by the end of the year, according to the median forecast in a survey conducted by Bloomberg. 

Pakistan’s administration is also negotiating a fresh loan program with the International Monetary Fund. Fresh support from the Washington-based lender will be key to shore up foreign exchange reserves and meet its debt payments of $24 billion in next fiscal year. 

Prime Minister Shehbaz Sharif’s upcoming budget is expected to announce strict fiscal and monetary measures, including raising taxes and energy tariffs, to win the lender’s nod for further funds. The central bank did warn that the budget scheduled for later this week brings an upside risks to near-term inflation and that there is uncertainty regarding energy prices.