The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) announced that it was lowering the key policy rate by 200 basis points, making it 17.5 per cent. This marks the third time in a row that the interest rate has been cut.

In a statement, the MPC said, “At its meeting today, the committee decided to reduce the policy rate by 200 bps to 17.5 per cent, effective from September 13, 2024.”

The statement also explained that both headline and core inflation dropped significantly in the last two months.

This decrease was faster than what the MPC had expected earlier. The main reasons for this were the delay in raising energy prices and favourable changes in global oil and food prices.

However, the MPC also noted that these changes came with a lot of uncertainty, which is why they’ve remained cautious with their monetary policy.

The committee highlighted that keeping a tight monetary policy has been crucial in reducing inflation steadily over the past year.

According to a statement issued by the SBP, the pace of this disinflation has somewhat exceeded the Committee’s earlier expectations, mainly due to the delay in the implementation of planned increases in administered energy prices and favourable movement in global oil and food prices.

At the same time, the committee acknowledged the inherent uncertainty related to these developments, which warranted a cautious monetary policy stance.

The committee underscored the importance of the tight monetary policy stance in driving the

sustained decline in inflation over the past year.

The MPC noted the key developments since its last meeting that have implications for the macroeconomic outlook. First, global oil prices have fallen sharply, though they remain volatile. Second, SBP’s FX reserves are around $9.5 billion as of September 6, despite weak official FX inflows and continued debt repayments.

Third, secondary market yields of government securities have declined noticeably since the last MPC meeting. Fourth, inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly. Lastly, the FBR tax collection during July/August 2024 was lower than the target.

Taking into account these developments as well as the potential risks to the inflation outlook and today’s decision, the MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5 – 7 per cent and help ensure macroeconomic stability. This would be essential to achieve sustainable economic growth over the medium term.