Pakistan's Central Bank Reduces Interest Rate To 20.5% Amidst Inflation

Pakistan's central bank on Monday cut interest rate by 1.5% points to 20.5% amidst improvement in inflation. In a statement, the State Bank of Pakistan said that its Monetary Policy Committee had met earlier on Monday and reviewed the current economic developments, highlighting “better than anticipated” decline in inflation for May.

The MPC noted some upside risks to the near-term inflation outlook associated with upcoming budgetary measures and uncertainty regarding future energy price adjustments.

"Not with standing these risks and today’s decision, the Committee noted that the cumulative impact of earlier monetary tightening is expected to keep inflationary pressures in check," according to the policy statement.

The SBP noted that the real interest rate still remains significantly positive, which is important to continue guiding inflation to the medium-term target of 5–7%.

The bank also said that the government had approached the IMF for a long term loan which would help to unlock financial inflows and further build-up foreign exchange reserves.

The MPC also said that real GDP growth remained moderate at 2.4% with subdued recovery in industry and services partially offsetting the strong growth in agriculture.

“Second, reduction in the current account deficit has helped improve the foreign exchange reserves to around $9 billion despite large debt repayments and weak official inflows,” it added.

The reduction of policy rate comes after a long time as the bank had maintained a record-high policy rate of 22% for the past 11 months.

The highest interest rate resulted following an accumulative hike by 15 percentage points over three years to control inflation.

The change was prompted by an 11.8% reduction in inflation in May, which had hit a multi-decade high of 38% in May last year.

The policy measure becoming effective on Tuesday is expected to spur economic growth in the next fiscal year starting July 1.