Explained: Pakistan followed in the footsteps of Canada and Europe, took this big step

The Central Bank of Pakistan has cut the official interest rate.

Neighboring Pakistan has followed in the footsteps of Canada and Europe. Despite the inflation rate being over 17 percent, the Central Bank of Pakistan has taken a step that even the US Federal Reserve and India’s RBI do not have the courage to take. Yes, Pakistan has reduced its interest rates by one and a half percent. This decision has come at a time when a few days ago the Central Bank of India did not make any change in the repo rate citing the need to fight inflation for a few more days. On the other hand, the Federal Reserve meeting will also be held in a few days. The Federal Reserve is also expected to be willing to make no changes to its interest rates. The special thing is that Europe and Canada recently reduced their official rates. After which speculations arose that other countries around the world would also reduce their interest rates.

Pakistan took a big step

The Central Bank of Pakistan on Monday cut the policy rate by between 1.5 percent and 20.5 percent amid improving inflation. The State Bank of Pakistan (SBP) said in a statement that the current economic growth was reviewed in its Monetary Policy Committee (MPC) meeting. During this period it was learned that inflation had decreased more than expected in May. The MPC also noted some risks to the near-term inflation outlook related to uncertainty over upcoming budget measures and future energy price adjustments. According to the statement, despite these risks and the decision to cut rates, the measures taken above are expected to limit inflationary pressure.

How much has inflation been reduced?

According to Pakistani media reports, Pakistan’s inflation rate has come down to 17.3 percent. Which is less than half compared to the same period last year. In May 2023, Pakistan’s inflation rate peaked at 38 percent. While in May 2022, Pakistan’s inflation rate was over 20 percent. This means that the inflation rate in Pakistan has fallen to its lowest level in two years. In such a situation, Pakistan’s growth of around 17 percent in the month of May this year is nothing short of a miracle. According to media reports, Pakistan’s inflation rate has fallen by 0.4 percent monthly. This means that for the first time since June 2023, Pakistan’s inflation rate has moved into negative territory. In its monthly economic report, Pakistan’s Finance Ministry said it expects inflation to range between 18.5 percent and 19.5 percent in April and decline to 17.5 percent-18.5 percent in May.

India made no changes

Separately, Indian interest rates were announced on Friday. The RBI governor has not made any change in the country’s repo rate for the eighth consecutive time. Currently the official interest rate remains at 6.5 percent. The last time the RBI changed the repo rate was in February 2023. The MPC then increased interest rates by 0.25 per cent. From May 2022 to February 2023, the RBI had increased the policy rate by 2.50 per cent. The RBI estimates that India’s inflation rate may remain at 4.5 percent this year. While the growth rate can be 7.2 percent. However, in the month of April, India’s inflation rate was below 5 percent for the second consecutive month. The SBI estimates that India’s inflation could drop to 5 percent in the month of May.

What is India’s position?

Announcing the interest rates, the RBI governor said it is understood that India follows the US Central Bank. but it’s not like that. India has its own inflation outlook and growth rate. India will progress accordingly. Until the inflation rate in India reaches the target level, no decision will be taken that is not in the interest of the country and the common people. However, the RBI’s MPC has indicated that interest rates will remain liberal in the coming months. Therefore, it is speculated that interest rates could be reduced at the meeting that will be held in October or December. However, many experts also estimate that there is no possibility of the Central Bank of India reducing the inflation rate in the current financial year.

Canada and the European Bank made cuts

Last week, two central banks around the world announced reductions in their interest rates. First let’s talk about Canada. The Central Bank of Canada announced the world’s first interest rate cut. Canada has reduced its official interest rate from 5 percent to 4.75 percent. On the other hand, on Thursday of last week, the European Central Bank also announced a reduction in interest rates after almost 5 years. The bank has reduced its interest rates by 0.25 percent. According to experts, in the coming months other countries in the world, such as the United States, could also announce reductions in their interest rates. There is news that the US Federal Reserve could cut interest rates twice in the second half. Which can be 0.25 to 0.25 percent. This means that interest rates can be reduced by a total of 0.50 percent.

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