The State Bank of Pakistan (SBP) on Monday reduced the interest rate by 1% or 100 basis points (bps) from 20.5% to 19.5%, the second cut in a row, citing a slight cooling in the inflation rate — a move that is mostly in line with the general market consensus.

Addressing a press conference after MPC meeting on Monday, SBP Governor Jameel Ahmad said “We have noted that the inflation is on a declining trend.”

Last month, the SBP’s Monetary Policy Committee (MPC) trimmed its benchmark interest rate by 150 bps to 20.5% last month, following a record-high 22% that had been maintained for almost a year.

SBP governor said the inflation rate has come down to 12.60% from 38% while the external account has continued to improve.

The central bank in a statement said the announcement of monetary easing showed positive indicators for the national economy citing a slight drop in inflation, a build-up in SBP’s foreign exchange (FX) reserves despite repayments of debt, and a staff-level agreement with the International Monetary Fund (IMF) for a 37-month EFF program of about $7.0 billion.

It added that the committee assessed that the external account has continued to improve, as reflected by the build-up in central bank’s FX reserves despite substantial repayments of debt and other obligations.

The developments – along with significantly positive real interest rate – led to the further reduction in the policy rate in a calibrated manner to support economic activity, while keeping inflationary pressures in check.

Since its last meeting, the committee noted the key developments that the current account deficit narrowed sharply in FY24 and SBP’s FX reserves improved significantly from $4.4 billion at end-June 2023 to above $9.0 billion.

The country reached a staff-level agreement with the IMF for a 37-month extended fund facility (EFF) programme of about $7.0 billion, the official statement read, adding that sentiment surveys conducted in July showed a worsening in inflation expectations and confidence of both consumers and businesses.

Fourth, international oil prices have remained volatile in recent weeks, whereas prices of metals and food items have eased. Lastly, with the ease in inflationary pressures and labour market conditions, central banks in advanced economies have also started to cut their policy rates.

Taking stock of the developments, the MPC assessed that, despite today’s decision, the monetary policy stance remains adequately tight to guide inflation towards the medium-term target of 5% – 7%.

The assessment is also contingent on achieving the targeted fiscal consolidation, timely realisation of planned external inflows and addressing underlying weaknesses in the economy through structural reforms, it added.