Pakistan Cuts Rates as Policymakers Try to Revive Economy

Pakistan cut its benchmark interest rate for a second consecutive meeting as slowing price gains give policymakers room to focus on shoring up growth in the cash-strapped South Asian nation.

The State Bank of Pakistan reduced the target policy rate by 100 basis points to 19.50%، according to central bank governor Jameel Ahmad. The move was predicted by 31 out of 51 analysts in a Bloomberg survey.

“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،” the central bank said in a statement on its website.

Slashing rates in June

The central bank slashed rates in June for the first time in four years، going for a 150 basis point cut. Pakistan is trying to keep its economy afloat after dodging a default last summer and the government has set a 3.6% growth target for the new fiscal year from 2.4% in the previous year that ended in June. The central bank expects growth between 2.5% and 3.5%.

The government this month signed a staff-level agreement with the International Monetary Fund for a fresh $7 billion loan. Fitch Ratings raised Pakistan’s credit rating، citing reduced risks from external funding after it secured the new loan program.

Keeping up with debt payments

The country has been lurching from one IMF loan to another to keep up with debt payments، which this year stand at about $26 billion. Pakistan has to pay about $10 billion while rest of the loans are expected to be rolled over in the year started July، Governor Jameel Ahmad told a press briefing in Karachi on Monday.

Raising interest rates had been a part of the condition، and Pakistan’s inflation، which remains Asia’s fastest، has been slowing even though there are signs of volatility.

Price gains are expected to further weaken to 10.6% in July mainly due to a favorable base effect this month، according to median estimate in a Bloomberg survey. Consumer prices quickened to 12.57% in June for the first time in six months thanks to increased energy costs.

“Inflation is on a declining trend،” said Ahmad. The central bank expects average inflation to remain in the range of 11.5%–13.5% in the current fiscal year that began in July، lower than 23.4% last year.