The State Bank of Pakistan (SBP) announced on Monday that it had decided to cut the key interest rate by 100 basis points (bps) to 19.5 per cent from the previous rate of 20.5pc.

The Monetary Policy Committee (MPC) statement issued by the central bank said that it had decided to cut the policy rate by 100bps to 19.5pc, effective from July 30, 2024.

Addressing a press conference, SBP Governor Jameel Ahmad said the central bank’s MPC had met earlier today and reviewed the current economic developments, highlighting the key role of declining inflationary pressure in the decision.

Furthermore, the MPC statement said that the committee had observed that the June 2024 inflation was slightly better than anticipated, adding that it also assessed that the inflationary impact of the fiscal year 2025 budgetary measures was broadly in line with earlier expectations.

It also noted that the external account has continued to improve, as reflected in SBP’s foreign exchange reserves “despite substantial repayments of debt and other obligations”.

Due to these reasons, the committee “viewed that there was a room to further reduce the policy rate in a calibrated manner to support economic activity, while keeping inflationary pressures in check”.

On positive developments, the statement said that the current account deficit had narrowed in the fiscal year 2024 and SBP’s FX reserves had “improved significantly from $4.4 billion at end-June 2023 to above $9 billion”.

Furthermore, it highlighted that the country had reached a staff level agreement with the International Monetary Fund (IMF) for a 3-year extended fund facility programme of $7bn.

Regarding the inflationary outlook, the statement said that headline inflation rose to 12.6pc year-on-year in June 2024 from 11.8pc in May, driven by higher electricity tariffs and Eid-related price increases.

However, it noted that core inflation had steadied around 14pc over the past two months, highlighting that the inflationary impact of the new budget is “largely in line with expectations”.

Previously, the headline inflation for June clocked in at 12.6pc on year-on-year, according to data from the Pakistan Bureau of Statistics (PBS).

Earlier, market participants had widely anticipated a rate cut given June’s inflation rate of 12.6pc, significantly lower than the interest rate of 20.5pc, though opinions had varied on the extent of the reduction.