Central bank expected to slash Pakistan interest rates
Business
Experts see a 1pc to 2pc rate cut
- CPI in May dropped to 11.18pc – a 30-month low
- Annual inflation had reached 38pc in May 2023
- Bank of Canada and European Central Bank earlier this week reduced their respective borrowing costs by 25 percentage points
LAHORE/KARACHI (Dunya News/Web Desk) – As the central bank’s Monetary Policy Committee (MPC) is set to meet today (Monday) amid rapid decline in inflation, an overwhelming majority of experts are expecting a reduction in borrowing costs, as Pakistan currently has a record high 22 per cent interest rate.
Experts and market are generally very critical of the central bank and the International Monetary Fund (IMF) for sticking to the rigid monetary tightening, which along with a massive rupee devaluation has propelled the cost of doing business to a record high, thus crippling the national economy and worsening the cost of living crisis experienced by an overwhelming majority.
That’s why some of circles are even suggesting that the State Bank of Pakistan must go for 3pc rate cut to trigger an economic activity in the country where higher inflation, shrinking purchasing power and fewer job opportunities have created an unprecedented cost of living crisis.
Last week, Finance Minister Muhammad Aurangzeb had told Chinese investors in Shenzhen that Pakistan had been witnessing continuous improvement in macroeconomic indicators, including a drastic decline in inflation, adding that the issue of interest rate cuts would have to be looked into during the current year.
It was not the first time that the finance minister has indicated at rate cuts, as he previously said that the rate cut cycle would start in June.
CPI SAYS IT ALL
The reason is simple: The consumer price index (CPI) has been witnessing a consistent decline for the last five months – from January to May – as it dropped to 30-month low of 11.8 per cent last month.
For December, the CPI was calculated at 29.7 which declined to 28.3 in January, followed by 23.1 in February, in 20.7 March, 17.3 in April and now 11.8 in May.
Earlier, the CPI had touched a record high in May 2023 by clocking at 38.0pc, as Pakistan is grappling with an economic crisis triggered and sustained by currency devaluation, expensive imports and higher interest rates.
IT’S HAPPENING AT LAST
Although the Federal Reserve isn’t expected to US interest rates till September given the trend witnessed in inflation data, the Bank of Canada earlier this week became the first among the G7 countries to slash the rates by 25 percentage points from 5 per cent to 4.75 per cent.
Meanwhile, the European Central Bank (ECB), as predicted, followed the Canadian peer and slashed the eurozone interest rates by 0.25pc from 4pc to 3.75pc.
DON’T RELY ON US FED
Even the IMF, which has been strongly advocating monetary tightening, in earlier May had said that the Asian central banks should continue to focus firmly on domestic price stability and avoid making policy decisions overly dependent on anticipated interest rate moves by the Federal Reserve.
It is the relatively lower inflation in Asia which was cited as a reason, said IMF Director for Asia Pacific Krishna Srinivasan saying, “Asian countries are better placed to cope with exchange rate movements today owing to fewer financial frictions and better macro fundamentals and institutional frameworks, and should continue to allow exchange rates to act as a buffer against shocks."
