Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) unleashed its most aggressive reduction in key policy rate since April 2020, cutting it by 200 basis points (bps) to bring it down to 17.5 percent amid slowing inflation and declining international oil prices.

"At its meeting, MPC decided to cut policy rate by 200bps to 17.5 percent, effective from September 13, 2024," it said in statement. "Both headline and core inflation fell sharply over past two months. Pace of this disinflation has somewhat exceeded MPC's earlier expectations, mainly due to delay in implementation of planned increases in administered energy prices and favourable movement in global oil and food prices." However, MPC said that there is still an inherent uncertainty, "Which warranted cautious monetary policy stance". "In this regard, committee underscored importance of tight monetary policy stance in driving sustained decline in inflation over past year," it added. Citing positive developments including decline in oil prices and improvement in FX reserves, MPC assessed real interest rate to still be adequately positive "To bring inflation down to medium-term target of 5-7 percent and help ensure macroeconomic stability".

"This would be essential to achieve sustainable economic growth over medium term," it added. MPC observed that continued ease in inflationary pressures and unfolding impact of recent policy rate cuts will support growth prospects in industry and services sectors. MPC viewed possibility of FY25 average inflation falling below earlier forecast range of 11.5-13.5 percent. "However, this assessment is contingent on achieving targeted fiscal consolidation and timely realisation of planned external inflows," it said.