At last, the SBP has cut the policy rate by 150 bps to 20.5% after maintaining it at 22% for seven MPC meetings since June last year.
This should exert downward pressure on inflation, provided that a resurgence in demand does not put pressure on the exchange rate.
The KIBOR had been inching down for weeks and fell below 21% last week.
The stock market should also react positively to this.
In our opinion, this rate cut needs to be accompanied by other structural changes at the public finance level. Otherwise, except for some possible external factors such as a decline in international oil prices, there will be no support at the national level for a sustained decline in interest rates.
The policy rate remaining above 20% primarily reflects a breakdown in the management of public finances. Unless we see progress in curbing government expenditure and managing the circular debt in the energy sector, the cut in the policy rate will not be sustainable.