IN an aggressive move, the State Bank on Monday reduced its key policy rate by a hefty 250bps to 15pc. This is the fourth straight cut since June, bringing the total decrease in rates to 700bps as inflation has been declining faster than expected over the last several months, reaching closer to the bank’s medium-term target range of 5pc-7pc. Pakistan’s annual inflation rate dropped to a 44-month low of 6.9pc in September but rose slightly to 7.2pc last month. Real interest rates remain significantly positive, underscoring the bank’s cautious stance. The IMF, too, has revised down its inflation forecast for Pakistan, projecting consumer prices to average 9.5pc in FY25 against its earlier estimate of 12.7pc. The reduction in inflation is good news for the economy as the lower borrowing costs will slash debt payments. The SBP expects federal debt payments to fall below 50pc of government revenues during the ongoing fiscal on lowering lending rates compared to the earlier budgeted projections of 60pc. Still, it is unclear if this will also spur private credit.

While the bank has cut lending rates in the last two sessions more aggressively than anticipated by analysts, it has also pointed to some risks to the inflation outlook. The latest monetary policy statement, for example, warns that a sharp fall in the pace of disinflation in recent months is helped by the “absence of expected adjustments in gas tariffs and PDL rates” besides deceleration in food inflation and “favourable global oil prices”. That means inflation might edge up once the government decides to make the necessary energy price adjustments as required under the IMF programme. The bank is also worried about the shortfall in tax collection, which may force the government to introduce a ‘mini budget’, imposing additional taxation in the third quarter of the fiscal year to meet budgeted goals, especially the primary balance target. The IMF has already refused to allow the downward adjustment of tax targets. Another risk relates to the instability in the Middle East, pushing up oil and commodity prices. While the country can absorb a 10pc-15pc raise in oil prices, any increase beyond that will unsettle the fragile external account stability. In short, while there may be less economic uncertainty for now, with inflationary pressures easing, the external account stabilising and borrowing costs falling, nothing is certain about these ‘achievements’.

Published in Dawn, November 5th, 2024