Pakistan’s Easing Prices Gives Room for Rate Cuts, Governor Says

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(Bloomberg) — Pakistan’s central bank governor said that cooling inflation gave “ample room” to loosen monetary policy, just a day after cutting benchmark interest rate to the lowest in almost three years.

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Headline and core inflation are both trending down, “with that we have ample room to cut rates,” Jameel Ahmad, the governor at State Bank of Pakistan said in an interview with Bloomberg TV’s Shery Ahn on Tuesday. “Our real interest rates in the short term are quite positive and that is providing us with flexibility for rate cuts,” he said. 

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After hitting an all-time high of 38% in May 2023, Pakistan’s inflation has recorded a single-digit rise in the last few months. The central bank targets inflation between 5% to 7% but has flagged risks to the outlook from changing commodity prices and protectionist policies in major economies. 

“We are not facing at this stage any pressure as far as the external account is concerned,” said Ahmad, when asked about the impact of volatile commodity prices on future rate cuts. “Given the current level of price and also the future outlook, I think we have ample room,” he said, adding that current account is in surplus, giving the central bank “confidence that we can review the policy rate and revise it slightly down.”

The South Asian country’s central bank has been easing since June last year to boost demand and support economic recovery. Bloomberg Economics expects the central bank to hold the key rate through December as prices may rise again. 

The loosening in the last few months is a drastic switch in stance for Ahmad, who had hiked interest rates to a record 22% in 2023 as the country saw Asia’s fastest inflation due to soaring energy costs. 

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Ahmad was handed a five-year term to head Pakistan’s central bank in 2022, and faced the challenge of stabilizing an economy that was shattered by sky-rocketing prices, political instability and a depreciating currency. Prior to becoming the governor, Ahmad had spent over three decades at various senior positions at the State Bank of Pakistan and the Saudi Central Bank. 

In the last few months, Pakistan has made its way out of the economic crisis, after it avoided a default and secured a bailout from the International Monetary Fund and loans from friendly nations. The recovery has boosted investor sentiment and shielded the local currency from the strong dollar in the past three months. 

The current level of reserves “is providing basis for the stability of the currency,” the governor said. Pakistan’s current foreign reserves stood at $11.4 billion last week, a level that covers two months of imports.

—With assistance from Naman Tandon.

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