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October 25, 2020

Pakistan Cuts Key Interest Rate to 7 Percent Amid Easing Inflation

Karachi – Pakistan cut its benchmark interest rate to 7 percent from 8 percent for the next two months amid easing inflation and as the foreign exchange reserves continued to upward trend.

The State Bank of Pakistan announced the new rate on May 23, encouraged by the signs of stability in key areas achieved through domestic policies and favorable external developments, mainly the low global oil prices.  The rate is the lowest in 42 years, according to Bloomberg calculation.

“Current account deficit has narrowed down; average annual inflation is significantly below the target; there is a marginal uptick in real GDP growth; and foreign exchange reserves buildup continues,” the bank said in a policy statement.

Finance Minister Ishaq Dar welcomed the lowering of policy rates, saying it would spur business and economic activities in the country.

Pakistan has stayed on track with regard to its ongoing program with the International Monetary Fund and is expecting release of $506 million in June, part of the $6.6 billion loan it secured in 2013 to stave off a balance of payment crisis.

Improvement in South Asia’s second-biggest economy has also led to the up-gradation of its credit-rating to positive from stable by Standard and Poor’s, affirming a B-rating.

The State Bank also set a target rate for the overnight repo at 50 basis points below the 7.0 percent ceiling rate.

Led by sharp decline in oil prices, the external current account deficit at $1.4 billion during July-April, FY15, around half of the deficit recorded in the same period of last year. Foreign exchange reserves with the State Bank rose to $12.5 billion as of May 15, 2015.

The year-on-year inflation declined to 2.1 percent in April from 8 percent in June, 2014. However, uncertainty about international oil prices and possible adjustment in domestic energy prices are the main risks to the inflation outlook.

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