The State Bank of Pakistan (SBP) announced on Monday that it has decided to cut the policy rate to 11 per cent, amid trade and industry sectors advocating for a significant cut.
The central bank’s policy rate, after being slashed by 1,000bps from 22pc since June 2024 in six intervals, previously stood at 12pc.
April inflation stood at a low of 0.3pc, largely due to a high base a year ago. The reduction is also primarily attributed to lower prices of key food staples such as wheat and its derivatives, onions, potatoes and certain pulses, as well as a cut in electricity and fuel charges. These items carry significant weight in the inflation basket — the Consumer Price Index (CPI) — meaning minor price changes can heavily influence the overall rate.
According to a notification issued by the SBP today, the Monetary Policy Committee (MPC) decided to cut the interest rate, noting that inflation in April turned out to be lower than expected, mainly due to a drop in prices of perishable food items and electricity and fuel charges.
Earlier, it noted that despite a long-term decline in inflation and real interest rates above 11pc, opinions on the central bank’s likely decision on the policy rate were divided, with trade and industry sectors advocating for a significant cut.
Researchers had conducted polls to gauge market sentiment, but the 0.3pc inflation in April has caused division among those who were confident there would be no change in the interest rate.
However, many experts believed the SBP would cut the rate by 50bps. Some have also found reasons for a likely status quo as they feel the war-like situation between India and Pakistan has created uncertainty that may escalate prices.
This situation may force the central bank to adopt a cautious approach in the face of sudden shocks of higher inflation.
The SBP’s MPC met today to set the key interest rate for the next two months. In March, the central bank delivered a surprise by leaving its policy rate unchanged in the last review, disappointing the business community.
