The State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) on Monday cut the policy rate by 250 basis points, reducing it from 17.5 to 15 percent, citing a faster than anticipated decline in inflation during October.
This is the fourth consecutive cut to the policy rate. In June, the SBP slashed the policy rate from 22 percent to 20.5%; in July it further reduced it to 19.5%; and in September, the policy rate was reduced to 17.5%. In total, the central bank has cut the rate by 700 basis points in its last four monetary policy meetings.
In October, the Pakistan Bureau of Statistics recorded inflation of 7.2%, the third consecutive month that has posted single-digit inflation after a peak of 38 percent last year. According to the central bank’s statement, this was close to the medium-range target. It credited the prevailing tight monetary policy stance, stressing this continued to play an important role in sustaining the downward trend in inflation.
“Moreover, a sharp decline in food inflation, favorable global oil prices and absence of expected adjustments in gas tariffs and PDL rates have accelerated the pace of disinflation in recent months,” it said, while cautioning that “inherent” risks persisted and “the near-term inflation may remain volatile before stabilizing within the target range.”
The MPC noted that the IMF Board had approved Pakistan’s Extended Fund Facility program, curbing uncertainty and improving the prospects for realization of planned external inflows. “Second, the surveys conducted in October showed an improvement in confidence and a reduction in inflation expectations of both consumers and businesses,” it said.
“Third, the secondary market yields on government securities and KIBOR have declined substantially. Fourth, tax collection during the first four months of FY25 fell short of target. Lastly, while the global oil prices have exhibited significant volatility amidst escalating geopolitical tensions, prices of metals and agricultural products have increased notably,” it noted.
“Considering these developments, the MPC viewed the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the 5-7 percent target range. This will also support macroeconomic stability and help achieve economic growth on a sustainable basis,” it added.
On inflation, the MPC noted that the recent decline was a result of contained demand, improved domestic supply of key food commodities, benign global oil prices and a favorable base effect. “The MPC noted that continuation of these factors may bring inflation further down in the next few months,” it said, adding underlying inflationary pressures were also easing, as indicated by a relatively gradual decline in core inflation and moderation in inflation expectations.
In light of these developments, read the statement, the MPC expected average inflation for the current fiscal to be “significantly” lower than its previous forecast range of 11.5-13.5 percent. However, it added, risks stemming from the Middle East conflict, recurrence of food inflation pressures, ad hoc adjustments in administered prices and implementation of contingency taxation measures to meet shortfalls in revenue could reverse these gains.
The MPC further noted higher than targeted estimates of rice and sugarcane production, stating these “more than offset” the estimated shortfall in maize and cotton output. It said the pace of industrial activity was improving, as indicated by increasing imports of raw materials and machinery, improving business confidence, and easing financial conditions. “Overall, the MPC expects real GDP growth in FY25 to be better than its earlier assessment, while remaining in the range of 2.5-3.5 percent,” it added.
According to the central bank’s statement, the current account posted a surplus for the second consecutive month in September, narrowing the cumulative deficit to $98 million in the first quarter of FY25. “Despite a substantial increase in imports, robust workers’ remittances and higher exports helped contain the deficit,” it said, adding there was also a “slight” uptick in foreign investment.
“Going forward, imports are expected to pick up further amidst increasing economic activity,” it said, adding relatively higher workers’ remittances and exports would help contain the current account deficit within the projected range of 0-1 percent of GDP. “This, together with the realization of planned official inflows, is expected to increase the SBP’s FX reserves to around $13 billion by June 2025,” it added.