Pakistan's Central Bank Poised for Further Interest Rate Reduction
Analysts anticipate another cut in Pakistan's key interest rate as inflation hits single digits. The move follows recent reductions and aligns with economic stabilization efforts.
Financial experts are unanimously predicting a further reduction in Pakistan's key interest rate during the upcoming policy meeting of the State Bank of Pakistan. This anticipated decision comes in the wake of inflation dropping to single digits for the first time in nearly three years.
The State Bank of Pakistan, established on July 1, 1948, has already implemented two consecutive rate cuts in recent months. These reductions, totaling 250 basis points, have brought the rate down from its peak of 22% to the current 19.5%. The upcoming meeting, scheduled for September 12, 2024, is expected to continue this trend.
A survey of 14 analysts reveals a consensus on the likelihood of another rate cut. The predictions range from 100 to 200 basis points, with the majority anticipating a 150 basis point reduction. This move aligns with Pakistan's efforts to stabilize its economy, which is the 23rd largest globally by nominal GDP.
The recent rate cuts have coincided with significant economic developments. In July 2024, Pakistan reached a staff-level agreement with the International Monetary Fund (IMF), which has provided multiple bailout packages to the country over the years. Additionally, the government introduced a new budget with ambitious tax and revenue-raising targets.
Jameel Ahmed, who assumed the role of central bank chief in 2022, expressed satisfaction with the outcomes of the recent rate cuts in an interview. He noted that inflation continues to decelerate while the current account remains under control. This balance is crucial for Pakistan's economy, which heavily relies on textile exports and remittances from overseas Pakistanis.
The latest economic data shows that Pakistan's annual consumer price inflation rate decreased to 9.6% in August 2024, marking the first single-digit reading since 2021. This trend is particularly significant given that Pakistan has a large informal economy, estimated at around 35% of GDP.
"Real interest rates of 10% are at the highest level in the last three decades. Risks to inflation are also low given softening commodity prices and a fiscally prudent stance of the government for now. In view of this, it makes sense to do at least a 200-bps cut without hurting FX expectations too much."
As Pakistan continues to implement economic reforms to attract foreign investment and develop special economic zones, the central bank's decisions play a crucial role in shaping the country's economic landscape. The upcoming policy meeting will be closely watched by both domestic and international observers, as it could have significant implications for Pakistan's economic trajectory in the coming months.
