The Karachi Inter-Bank Offered Rate (KIBOR), a key benchmark interest rate in Pakistan, has reached an 18-month low. This decline has positive implications for the private sector, as it makes financing more affordable and could stimulate economic activity.
The six-month KIBOR has decreased to 18.91%, while the three-month, nine-month, and one-year KIBORs have also fallen to 18-month lows. This significant drop in KIBOR rates suggests that the State Bank of Pakistan (SBP) may further reduce its benchmark policy rate in the coming months.
Analysts speculate that a potential 200 basis points reduction in the policy rate could increase demand for dollars, leading to a potential depletion of Pakistan’s already low foreign exchange reserves. However, the recent decline in government debt securities’ rates of return indicates that the market expects a rate cut.
The slowdown in inflation, which fell to a three-year low of 11.1% in July, provides a favorable environment for a rate cut. Pakistan currently has one of the highest real interest rates in the region, but a potential rate cut could bring it down to a more manageable level.
While a rate cut can stimulate the economy, it’s important to consider the potential impact on foreign exchange reserves and inflationary pressures. Factors such as electricity prices and international energy and food prices could influence inflation levels.
Overall, the decline in KIBOR rates and the favorable inflation outlook suggest that Pakistan’s economy may be headed towards a more conducive environment for growth. However, the country’s low foreign exchange reserves may limit the extent to which the central bank can loosen monetary policy.