Karachi, July 29, 2024 – In a bid to stimulate economic growth while keeping inflation in check, the State Bank of Pakistan (SBP) on Monday announced a 100 basis point reduction in its benchmark policy rate, bringing it down to 19.5%.
The decision comes on the heels of better-than-expected inflation figures for June 2024 and continued improvements in the country’s external account. The Monetary Policy Committee (MPC) expressed optimism about the economy’s trajectory but emphasized the need for continued fiscal discipline and structural reforms to ensure sustained growth.
The SBP highlighted that the current account deficit has narrowed significantly, foreign exchange reserves have strengthened, and the country has secured a staff-level agreement with the International Monetary Fund (IMF) for a $7 billion loan program. These factors have contributed to a more stable economic environment.
However, the MPC also acknowledged challenges such as rising inflation expectations, volatile international oil prices, and the government’s reliance on domestic borrowing, according to the SBP. The committee stressed the importance of achieving the targeted fiscal consolidation and timely realization of planned external inflows to support overall macroeconomic stability.
While the rate cut is expected to provide relief to borrowers and stimulate investment, the SBP has cautioned that the monetary policy stance remains tight to ensure inflation is gradually brought down to the medium-term target of 5-7%, the SBP said.
The decision of the SBP to ease monetary policy reflects a delicate balancing act between supporting economic growth and containing inflationary pressures. The success of this strategy will depend on the government’s ability to implement necessary fiscal reforms and address structural weaknesses in the economy.
The MPC has projected real GDP growth for the current fiscal year in the range of 2.5 to 3.5 percent, indicating a moderate recovery in economic activity. However, the central bank has warned that the growth in the agriculture sector is expected to slow down after a strong performance in the previous year.
Overall, the SBP’s decision to cut interest rates marks a significant step towards reviving economic growth. However, the path to sustained recovery remains challenging, and the central bank will need to closely monitor economic indicators to adjust its monetary policy stance as needed.