Pakistan finance minister eyes cut to key policy rate from 11%

In a bid to bolster growth and tame inflation, Pakistan’s finance minister, Mohammed Rafique, hinted this week that the government is looking to reduce the country’s key policy rate. The remarks came amid a backdrop of steadily falling inflation, a widening fiscal surplus, and a central bank that has been tightening monetary policy for the past two years. If the cut is approved, it would mark the first easing move by the Bank of Pakistan since the economic downturn began in 2020.

What the Minister Said

During a press conference on Tuesday, Rafique announced that the Ministry is “examining the feasibility” of cutting the policy rate, which currently stands at 7.5 %. He noted that inflation has been easing from a peak of 12.7 % in January to 10.5 % in June, and that the central bank’s latest inflation forecast projects a further decline to roughly 10 % by the end of the year.

“We believe a reduction of the policy rate is consistent with the trajectory of inflation and the current economic conditions,” Rafique told reporters. “We are working closely with the central bank and the financial sector to assess the appropriate timing and magnitude of such a move.” The minister also emphasized that any decision would be “data‑driven” and would consider the impact on the foreign exchange market, the cost of borrowing, and the overall stability of the banking system.

Rafique’s comments come as the government has recently announced a modest 1.5 % fiscal surplus for 2024–25, a key condition for the continuation of the International Monetary Fund (IMF) programme that Pakistan is negotiating. He stressed that the ministry is “fully aligned” with the IMF’s recommendations on maintaining a credible monetary stance while also providing sufficient support to the real economy.

The Central Bank’s Current Position

The Bank of Pakistan (BoP) has kept its policy rate at 7.5 % since September 2023, following a series of hikes that lifted it from 5.5 % earlier in the year. The BoP’s Monetary Policy Committee (MPC) has repeatedly cited the need to curb inflation, which remains stubbornly high at just over 10 % year‑on‑year. In its latest Monetary Policy Report, the MPC noted that “inflationary pressures have slowed, but a more accommodative stance is still premature given the vulnerability of the economy to external shocks.”

A policy cut, if implemented, would be the BoP’s first easing move since the onset of the pandemic‑era slowdown. The committee has, however, indicated that it will continue to monitor the inflation outlook closely. According to the report, the BoP’s projected inflation path would allow for a “possible rate cut in the third quarter” should the trend toward lower inflation prove durable.

Implications for the Economy

A lower policy rate would have several immediate effects. First, it would reduce the cost of borrowing for households and firms, thereby encouraging consumption and investment. In the banking sector, a cut would likely translate into lower lending rates, potentially boosting credit growth. Second, it could strengthen the Pakistani rupee by reducing the yield differential relative to other emerging markets. Finally, a more accommodative stance could ease the financing burden on the government’s current accounts, allowing for a larger fiscal deficit to support growth initiatives.

However, there are risks. A premature rate cut could reignite inflationary expectations, particularly if the rupee weakens sharply or if global commodity prices rise. The BoP will have to balance the need for growth with the risk of overheating. Furthermore, the policy decision will be closely scrutinized by the IMF, which has repeatedly warned that “excessive monetary stimulus could undermine the macro‑policy framework that the programme is built upon.”

Market Reaction and Analyst Views

Financial markets have reacted cautiously to Rafique’s statements. The Karachi Stock Exchange’s benchmark KSE‑100 index slipped by 0.8 % in early trading, while the Pakistan rupee fell 0.3 % against the U.S. dollar. Bond yields on 10‑year Pakistani government bonds increased by 2 basis points, reflecting a slight shift in risk perception.

Economist Fatima Zahid of the Institute for Economic Research (IER) cautioned that “while a rate cut could support growth, it will be contingent on the continued decline of inflation and the resilience of the current account.” She added that the BoP’s MPC is likely to “wait for more robust data before committing to a policy change.” In contrast, businessman and investment banker Muhammad Siddiq warned that “a timely rate cut could unlock latent demand and help the government achieve its fiscal surplus target.”

Looking Ahead

The government and the BoP have agreed to schedule a joint meeting of the Monetary Policy Committee in the next month to assess the feasibility of a policy cut. The BoP’s forthcoming Monetary Policy Statement, scheduled for the first week of next month, is expected to outline the committee’s stance on the policy rate. The Ministry has also indicated that any move to lower the rate will be coordinated with the IMF to ensure that the country’s macro‑policy framework remains on track.

In summary, Pakistan’s finance minister’s latest remarks signal a cautious but optimistic shift toward a more accommodative monetary policy. Whether the Bank of Pakistan will follow suit remains to be seen, but the conversation has opened a pathway that could accelerate economic growth, stabilize inflation, and keep the country’s macro‑economic agenda aligned with the IMF’s expectations.

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