Pakistan’s central bank cut its key interest rate by 150 basis points on Monday in a widely expected move, marking its first rate reduction in nearly four years in its effort to boost growth amid a sharp decline in retail inflation.
The decision to cut the key rate to 20.5 per cent comes two days ahead of Pakistan’s annual budget and a week after data showed inflation slowed to a 30-month low of 11.8 per cent in May.
It also comes ahead of Pakistan’s negotiations with the International Monetary Fund (IMF).
Pakistan is in talks with the IMF for a loan estimated to be anything between $6 billion to $8 billion to avert a default for an economy that is growing at the slowest pace in the region.
The growth target for the upcoming year is expected to be higher at 3.6 per cent than this year’s 2 per cent and last year’s economic contraction.
Analysts and the business community have had mixed reactions to the cut, and are looking forward to the upcoming budget for clarity on the central bank’s next moves.
“With headline inflation decelerating by 550 bps from April to 11.8 per cent in May, and the policy rate significantly positive, businesses generally expected a sharper cut. However, as the monetary policy committee points out, upward inflationary risks emanate from the FY 25 budget and future increases in energy tariffs. So the ball is in the government’s court to manage inflation. Businesses should derive comfort from the narrowing current account deficit, a primary surplus on the fiscal account, deceleration in the growth of currency in circulation, declining food inflation, and stable FX reserves… All these factors augur well for further reduction in the policy rate,” the Pakistan Business Council said.
“I expect that, while the policy rate should come down by 300 basis points, out of abundant caution it was reduced by 150-200 basis points. It will surely help a bit, though the rates will still be in a higher than workable range. But this will set the direction. We will also have to wait for the budget to see what the overall impact (is),” Musadaq Zulqarnain, Director Of The Pakistan Textile Council, said.
“The central bank has indicated that inflationary pressures are easing, supported by a significantly positive real interest rate. We believe that this monetary easing cycle will persist, with an additional 3-4 per cent decline expected in 2024. The stock market is expected to take the news positively. However, there remains fear and uncertainty over hefty taxation measures in the upcoming federal budget. For industries, it would be a welcome step as it would reduce borrowing costs. More importantly, it would be positive for the federal government fiscal account as well, as it is the largest borrower in the system,” Tahir Abbas, head of research at Arif Habib Limited, said.
“(I) don’t see (the cut) being an issue with the IMF as we are still very far from an accommodative policy stance (12 per cent or lower). (I) foresee aggressive rate cuts in the second half of the year (4-5 per cent) if we get an IMF programme,” Mustafa Pasha, chief investment officer at Lakson Investments, said.