The State Bank of Pakistan (SBP) announced a significant monetary policy adjustment on Thursday, reducing the policy rate by 200 basis points for the next 90 days. This brings the interest rate down to 17.5%.

The Monetary Policy Committee (MPC) convened today to determine the policy rate for the upcoming 1.5 months, with analysts predicting a rate cut of 150-200bps, driven by a lower inflation outlook.

The central bank reported a notable decrease in inflation, which dropped to 9.64% in August, reaching single digits. "Inflation continues to decline," stated the SBP, adding that the country’s economic growth is projected to hover around 3.5% for the current year.

This marks the third consecutive reduction in the policy rate, following a 150bps cut on June 26, 2024, and a 100bps cut on July 29, 2024. Analysts now foresee further reductions, with expectations that the rate could fall to 14-15% in the fiscal year 2025.

The key driver behind this series of cuts is the significant decline in inflation, both headline and core, which has eased to single digits. The business community had been advocating for an even larger reduction of 300-500bps, citing the favorable inflation environment.