Pakistan’s central bank cuts interest rate by 100 basis points

Pakistan’s central bank announced a cut of 100 basis points (bps) or one percentage point in the benchmark interest rate on Monday, taking it down to 19.5%.

This is the second rate cut in less than two months as the State Bank of Pakistan (SBP) had previously reduced the rate by 150bps from a record 22% on June 10.

SBP Governor Jameel Ahmed, in a press conference, said that inflation had shown a continuous decline while the current account deficit had also shrunk considerably from the time of the last review.

The central bank had hiked the interest rate to a record 22% last year as Pakistan’s inflation soared to 38% in May 2023. Since then, inflation has declined, and was recorded at 12.6% this June.

The cut is in line with market expectations. A survey conducted by Nukta prior to the SBP’s meeting on the interest rate had majorly expected a 100-150bps cut.

In his press conference, Ahmed said the economy is likely to grow in the range of 2.5-3.5% in the current fiscal year while inflation will likely stay in the bracket of 11.5- 13.5%.

The current account deficit is expected to be between 0-1% or around $4 billion in absolute terms.

The governor said during the current fiscal year, overall debt and interest payments on external borrowings were around $26 billion, with $16 billion borrowed on a government-to-government basis.

Nearly $1.1 billion has been paid so far in July and $2 billion has been rolled over while nearly $9 billion is left to be paid in this fiscal year.

The next monetary policy meeting is scheduled in September.

International ratings agencies and banks, including Fitch and JP Morgan, expect the SBP to cut the interest rate by up to 500-600bps in FY25.