Pakistan Unexpectedly Cuts Rates After IMF Loan Payout
The World Bank recently estimated the economy will likely grow 3% in the year ending June, below the central bank’s projection of growth being above 4% for the period.
Pakistan’s central bank unexpectedly cut interest rates to the lowest in almost three years on Monday, following the International Monetary Fund’s approval of another loan payment last week.
The State Bank of Pakistan reduced the target rate by 50 basis points to 10.5%, it said in a statement. Only two of the 42 economists surveyed by Bloomberg predicted the decision, while the rest had expected the rate to stay unchanged. The central bank pinned the decision on inflation outlook being stable.
“On balance, the inflation outlook remains broadly unchanged, mainly owing to the relatively benign global commodity prices and anchored inflation expectations, amidst prudent monetary policy stance,” said the central bank in a statement. This created “space to reduce the policy rate to support sustainable economic growth.”
The World Bank recently estimated the economy will likely grow 3% in the year ending June, below the central bank’s projection of growth being above 4% for the period. The current year growth will be slightly above the 30-year average and even better next fiscal year, Governor Jameel Ahmad said in an analyst briefing after the decision.
“The surprise rate cut broadly signals that the government might consider focusing on growth going forward while continuing stabilization,” said Shankar Talreja, an analyst at Topline Securities Pvt.
Pakistan’s Prime Minister Shehbaz Sharif said he was satisfied with the rate cut that will benefit businesses, according to a statement from the prime minister’s office after the decision.
The central bank’s decision is independent and does not appear to be under any pressure from the government or businesses with some calling for rate cuts earlier this year, said Iqbal Jawaid at AWT Investments Ltd.
State Bank of Pakistan had kept rates unchanged for four straight policy meetings before Monday, taking a cautious stance as inflation picked up above 6%. Escalating tensions between Pakistan and Afghanistan prompted the two countries to shut their borders, disrupting trade and pushing up food costs. Widespread flooding since late August across Punjab region also disrupted food supplies.
State Bank of Pakistan reiterated that price-growth will hover above its forecast range beyond December but still end the fiscal year within its target range of 5%-7%. The central bank’s assurance can help continue the easing cycle and take interest rates into single digits, said Yawar Uz Zaman at National Bank of Pakistan, one of the two analysts who predicted the decision.
The IMF last week approved a payout of $1.2 billion to Pakistan as part of a financial support program for the country. Funding from the IMF has helped the government repay its debt and bolster foreign exchange reserves. The loan program requires Pakistan’s central bank to maintain a tight, data-driven monetary policy to ensure macroeconomic stability, according to the fund.
