SBP’s decision to cut its key policy rate by 250 basis points marks a crucial moment in the country’s ongoing efforts to stabilize and rejuvenate its economy. This is the fourth consecutive reduction in the central bank’s policy rate which has now come down from 22% to 15% over a relatively short period. While the scale of the cut may not fully meet the immediate demands of the business community, it is nevertheless a positive signal of the central bank’s commitment to easing monetary policy and stimulating economic activity.
In its announcement, the SBP cited the recent and faster-than-expected decline in inflation as one of the key reasons for the policy rate reduction. Inflation has softened, largely driven by a sharp decline in food prices, favourable global oil prices and the absence of expected increases in gas tariffs and PDL. These factors have contributed to a more favourable macroeconomic environment, creating the necessary conditions for easing the monetary policy stance. The expectation is that borrowing will become more attractive to businesses and consumers alike. This could trigger resurgence in economic activity, as businesses take advantage of cheaper financing to invest in growth, innovation and capacity expansion.
For the consumer side, reduced borrowing costs may spur demand for durable goods, home mortgages and auto loans which would further fuel economic momentum. Calls for further reductions in the policy rate, potentially bringing it to single digits, are growing louder. Given the broader macroeconomic stability achieved by SBP through reduced inflation and stable exchange rates, there is ample room for additional rate cuts in the months ahead. While further rate cuts would undoubtedly benefit businesses, the government and central bank must continue to focus on the structural drivers of growth. Increased investment in industrial capacity, particularly in export-oriented sectors, is needed to enhance production capabilities and create high-quality jobs. A thriving industrial sector will not only create jobs but also help increase exports, which are essential for strengthening the country’s external sector and improving the balance of payments.
