Pakistan cuts key benchmark rate after 4 years amid easing inflation

The Central Bank of Pakistan cut the benchmark interest rate to 20.50 per cent.

This cut, the first in four years, is above expectations, with most economists predicting a 100-point decline.

Pakistan’s decision comes as consumer prices fell for the fifth consecutive month, driven by improved food supply in the country and lower fuel costs.

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The central bank had maintained an all-time high rate of 22 per cent since last June to contain inflation.

With inflation now lower than expected in May, the bank sees it as a matter of time to scale back the policy and support the economic recovery.

Pakistan is targeting an expansion of 3.6 per cent in the next fiscal year, up from 2.4 per cent in the current year.

The discount is expected to ease pressure on the Bank’s yields and enable it to meet debt obligations more effectively.

Economists forecast that the move begins a fiscal clean-up, predicting that the key rate could fall to 17.25 per cent by the end of the year.

The National Bank of Pakistan reveals that, despite the cut in real interest rates, real interest rates are still largely positive, guiding inflation towards a medium-term target of 5 to 7 per cent.

Pakistan is simultaneously negotiating a new loan facility with the International Monetary Fund.

Support from the IMF will be crucial to support foreign investment and meet the $24 billion debt repayment next fiscal year.

Prime Minister Shehbaz Sharif’s upcoming budget is expected to include a tighter monetary and fiscal policy, like raising taxes and energy tariffs, in order to raise more money for the IMF.

The central bank cautions that the upcoming budget could present near-term inflation risks and create uncertainty around energy prices.