Pakistan's Monetary Easing: Impact on Economy and Inflation

The State Bank of Pakistan cut the key policy rate by 200 bps to 13% due to improved inflation. This decision follows a decrease in food inflation and the phasing out of recent gas tariff hikes. The MPC noted a surplus in the current account for three consecutive months.

The State Bank of Pakistan has lowered its key policy rate by 200 basis points, bringing it down to 13% in response to improving inflation metrics. Effective from December 17, 2024, this policy adjustment was driven by reduced food inflation and a dissipating impact from November's increased gas tariffs.

The Monetary Policy Committee acknowledged that core inflation remains stubbornly high at 9.7%, and consumer and business inflation expectations are volatile. However, Pakistan's current account recorded a surplus for the third month straight in October 2024, bolstering foreign exchange reserves to about $12 billion.

Despite anticipation for a deeper rate cut by the business sector, authorities caution against a rapid reduction of interest rates but foresee a potential descent to single digits by mid-2025. Anticipation of a rate cut sparked a rally at the Pakistan Stock Exchange, with the KSE-100 index rising over 1.63%.

(With inputs from agencies.)