BY: BURHANUDDIN MUSTAFA Karachi :
Karachi : In a surprising and decisive action, Pakistan's central bank has implemented a record-breaking interest rate cut, signaling a significant shift in the country's monetary policy.? The State Bank of Pakistan (SBP) reduced its key policy rate by an unprecedented 250 basis points, a move that has caught the attention of
economists and investors worldwide. The SBP announced the rate cut on Monday, November 6, 2024, bringing the benchmark interest rate down to 15% from 17.5%. This marks the fourth consecutive rate cut since June, as the central bank continues its efforts to stimulate economic growth and ease inflationary pressures.
The magnitude of this rate cut exceeded market expectations. Prior to the announcement, a Reuters poll
of 15 investors and analysts had predicted a more modest reduction, with the majority forecasting a 200-
basis point cut. Only one respondent had accurately predicted the 250-basis point reduction.
This aggressive monetary easing comes as Pakistan's economy shows signs of stabilization following a
period of severe economic distress. Last summer, the country narrowly avoided defaulting on its financial
obligations, thanks to a timely bailout from the International Monetary Fund (IMF). The IMF's support has
been crucial in restoring some measure of economic stability to the South Asian nation.
In September, the IMF further bolstered Pakistan's economic prospects by approving a much-needed $7
billion facility. The international lender acknowledged Pakistan's progress, noting that the country had
taken key steps to restore economic stability through consistent policy implementation under the 2023-
24 standby arrangement.
While the economy has begun to show signs of recovery, inflation remains a concern. However, there has
been a notable improvement from the multi-decade high of nearly 40% recorded in May 2023. Recent
data shows that inflation for October 2024 stood at 7.2%, slightly above the government's expectation of
6-7%. The finance ministry is optimistic, projecting inflation to further decelerate to 5.5-6.5% in
November.
Despite these positive indicators, analysts argue that further rate cuts are necessary to truly invigorate
economic growth. Mustafa Pasha, Chief Investment Officer at Lakson Investments, suggests that rates
must drop below 15% and remain there for at least six months to have a material impact on the economy.
The IMF's latest October report provides a cautiously optimistic outlook for Pakistan's economic future.
The international body forecasts Pakistan's gross domestic product growth to reach 3.2% for the fiscal
year ending June 2025, up from 2.4% in fiscal 2024.
While lower interest rates are expected to provide some relief to the manufacturing sector, Ahmad
Mobeen, a senior economist at S&P Global Market Intelligence, cautions that the benefits may be limited.
He points to persistent challenges such as elevated input costs, driven by high electricity and gas tariffs,
combined with global supply and shipping constraints.
As Pakistan navigates this critical juncture in its economic trajectory, the effectiveness of this bold rate cut
will be closely watched by both domestic and international observers. The coming months will be crucial
in determining whether this aggressive monetary policy stance can successfully balance the dual
objectives of stimulating growth and managing inflation in one of South Asia's largest economies.
