SBP cuts key rate by 150bps to 20.5% as inflation cools off

The inflation figure of 11.8% indicated a significant reduction in inflation, suggesting there was substantial room for Pakistan to adjust its interest rates. Najeeb emphasized that with the downward trend in core inflation, CPI headline inflation, and food inflation, future monetary policies should reflect these positive changes.

Currently, Pakistan's economic growth is primarily driven by the agriculture sector, with a growth rate near 2.2%. Najeeb expressed optimism that the declining inflation and decreasing food prices, particularly due to successful wheat and rice harvests, would contribute to continued low inflation through the next June.

The Monetary Policy Committee (MPC) highlighted key points in their statement:
1. Real GDP growth was moderate at 2.4% in FY24, with strong agricultural growth partially offsetting weaker performance in industry and services.
2. The current account deficit reduction has improved foreign exchange reserves to around $9 billion despite significant debt repayments and weak official inflows.
3. The government is seeking an Extended Fund Facility from the IMF, which is expected to boost financial inflows and strengthen foreign exchange reserves.
4. International oil prices have declined, though non-oil commodity prices have increased.

Given these developments, the MPC deemed it appropriate to reduce the policy rate, noting that maintaining a significantly positive real interest rate is crucial for guiding inflation toward the medium-term target of 5-7%.

Over the past two years, Pakistan's economic activity has slowed due to the implementation of stringent reforms under an IMF bailout, aimed at stabilizing the economy. Finance Minister Muhammad Aurangzeb, speaking at a business conference in China, anticipated that interest rates would decrease in response to the falling inflation.