- Interest rates at lowest in three years, more cuts possible.
- Strong reserves providing basis for stabilising local currency.
- SBP governor cites current account surplus for policy flexibility.
Pakistan’s central bank governor, Jameel Ahmad, said that declining inflation has created “ample room” for further monetary easing, just a day after the country’s benchmark interest rate was slashed to its lowest level in nearly three years, The News reported citing Bloomberg.
Speaking to Bloomberg TV’s Shery Ahn on Tuesday, Ahmad highlighted that both headline and core inflation are on a downward trajectory, saying: “With that, we have ample room to cut rates.”
“Our real interest rates in the short term are quite positive and that is providing us with flexibility for rate cuts,” the State Bank of Pakistan’s (SBP) chief said.
Pakistan’s inflation, which peaked at an all-time high of 38% in May 2023, has now fallen to single-digit levels in recent months. The central bank aims to maintain inflation within the 5%-7% range but it has flagged potential risks to the outlook, including fluctuations in 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.”
Ahmad says the central bank can revise policy rates down further, after cutting them to the lowest level in almost three years. He spoke exclusively on ‘Insight with Haslinda Amin’ about his outlook for the economy, the country’s IMF loan, and debt rollovers with Saudi Arabia, the UAE and China.
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.
Ahmad was handed a five-year term to head Pakistan’s central bank in 2022, and faced the challenge of stabilising 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 SBP 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.
