SBP Cuts Interest Rate by 100bps as Fitch Upgrades Pakistan’s Rating

In a significant move, the State Bank of Pakistan (SBP) announced a reduction in the interest rate by 1 percent or 100 basis points (bps), bringing it down from 20.5% to 19.5%. This marks the second consecutive cut, reflecting a slight cooling in the inflation rate. The decision aligns with general market expectations and aims to support economic activity while keeping inflationary pressures in check.

Key Highlights:

1. Interest Rate Cut:
   • Current Rate: Reduced to 19.5%.
   • Previous Rate: 20.5%.
   • Reason: Declining inflation trend, with inflation decreasing from 38% to 12.6%.
2. Fitch Ratings Upgrade:
   • New Rating: CCC+.
   • Reason: Reduced external funding risks following a new bailout from the International Monetary Fund (IMF).

SBP Governor’s Statement:

SBP Governor Jameel Ahmad emphasized the positive economic indicators:

• Improved External Account: FX reserves increased despite substantial debt repayments.
• Future Projections: Average inflation expected to stabilize between 23% and 25%.
• Economic Confidence: The reduction reflects confidence in the current economic trajectory.

Monetary Policy Committee (MPC) Observations:

• Current Account: Deficit narrowed sharply in FY24.
• FX Reserves: Improved significantly, rising from $4.4 billion to over $9 billion.
• Economic Activity: Moderate, with auto and POL sales, and fertilizer offtake showing month-on-month increases.
• Real GDP Growth: Projected at 2.5% to 3.5% for FY25.

External and Fiscal Sector:

• Current Account Deficit: Expected to be in the range of 0-1.0% of GDP in FY25.
• Financial Inflows: Expected to support the current account deficit and strengthen FX buffers.
• Fiscal Consolidation: Emphasized for macroeconomic stability and future economic shocks.

Inflation Outlook:

• Current Inflation: 12.6% year-on-year in June 2024.
• Core Inflation: Steady at around 14%.
• Projected Inflation: Average inflation expected to be 11.5-13.5% in FY25.

Fitch Ratings Report:

• Upgrade: Reflects greater certainty over external funding availability.
• Challenges: Implementation of challenging reforms is crucial to avoid future downgrades.
• IMF Program: Expected to help narrow fiscal deficits and rebuild FX reserves.

Prime Minister’s Response:

Prime Minister Shehbaz Sharif praised the efforts of Finance Minister Muhammad Aurangzeb and his team, attributing the upgrade and economic improvements to the government’s policies. He emphasized continued efforts on economic reforms to benefit the populace.

The SBP’s decision to cut the interest rate, coupled with Fitch’s upgrade of Pakistan’s rating, indicates a cautiously optimistic outlook for the country’s economy. With improving external accounts, FX reserves, and a focused approach to fiscal consolidation, Pakistan aims to stabilize its economic trajectory while addressing underlying structural challenges.