On Monday, the State Bank of Pakistan (SBP) announced a 200 basis points (bps) reduction in its key policy rate, lessening it from 15% to 13%, and this policy will be applicable from December 17, 2024.
This resolve was made during the progression of ideas about the need for an important rate cut to encourage economic growth.
The Monetary Policy Committee (MPC) ascribed the rate cut to a continuous decline in food inflation and the lowering effects of the November 2023 gas charges hike.
Despite that, the SBP noticed that the base of inflation, which remains at 9.7%, remains a challenge, with inflation expectations from both consumers and businesses still unpredictable.
MPC, in its articulation, emphasized the many positive developments that have taken place. The present account in abundance for the third sequential month since October 2024, pitching in for a rise in SBP’s foreign exchange funds to about $12 billion.
In addition to this, the global prices stand favourable, which also helps in the reduction of domestic inflation and lowering of the import bill. The private sector also went through a noticeable increase in credit, contemplating the ease of financial conditions.
Financial experts had very different views on what the expected rate cut would be. While businesses looked forward to a larger reduction of 400 to 500 bps to promote economic growth, analysts had already foreseen a more conservative cut of 200 to 300 bps.
This conclusion was reached after the headline inflation rate, as measured by the Consumer Price Index (CPI), sharply decreased to 4.9% in November, creating space for the SBP to ponder upon a rate reduction. However, many experts thought that the central bank would not reduce its rate to single digits in one move, as required by some business representatives.
On the Pakistan Stock Exchange (PSX), shares rose frequently in expectancy of a rate cut, with the baseline KSE-100 index accelerating by 1.63%, or 1,867.61 points, to close at 116,169.41.
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