The State Bank of Pakistan (SBP) on Thursday announced it is slashing the key policy rate by 200 basis points, from 19.5% to 17.5%, fulfilling a key demand of the government and entrepreneurs alike to boost economic growth.
“The Monetary Policy Committee (MPC) decided to reduce the policy rate by 200 bps to 17.5 percent in its meeting today,” read a statement issued by the central bank, adding this was the result of a sharp decline in the core and headline inflation. However, it defended the cautious monetary policy stance due to inherent uncertainties linked to energy tariffs and global energy and food prices.
According to the statement, global prices had fallen sharply though remained volatile, while foreign exchange reserves stood at around $9.5 billion despite “weak official FX inflows and continued debt repayments.” Additionally, it said, secondary market yields of government securities had declined noticeably since the last MPC meeting, while inflation expectations and confidence of businesses had improved in the latest pulse surveys. A key additional factor, it said was the FBR collecting lower taxes than its target in July-August 2024.
“Taking into account these developments as well as the potential risks to the inflation outlook and today’s decision, the MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5-7 percent and help ensure macroeconomic stability,” it said, stressing this was essential to achieve sustainable economic growth over the medium term.
The central bank’s statement noted several recent high-frequency sales indicators reflected a moderate pick up in economic activity. “Domestic cement and POL sales (excluding furnace oil) increased by 8.5 percent and 6.8 percent on m/m basis in August, respectively,” it said, while manufacturing firms reported increased capacity utilization during the past couple of waves. “At the same time, the MPC noted that the outlook for the agriculture sector has weakened,” it said, crediting an expected shortfall in cotton production.
However, it said, the MPC had observed that an ongoing easing of inflationary pressures and the impact of policy rate cuts would support the growth of industry and services sectors. “On balance, therefore, the real GDP growth outlook remained in line with the MPC’s earlier assessment of 2.5-3.5 percent for FY25,” it added.
For the external sector, the statement noted that elevated workers’ remittance inflows and a substantial improvement in export earnings in July had offset an increase in imports and helped contain the current account deficit to $0.2 billion. “Going forward, import volumes are expected to increase, in line with the ongoing domestic economic recovery,” it said, adding the softening crude oil prices were expected to contain the overall trade deficit in FY25. “Also, export earnings are expected to remain stable as the growth in high value added textiles is expected to compensate for the likely reduction in rice exports,” it added.
For the fiscal sector, the SBP said FBR’s tax collection had grown by 20.5% in July-August, but stressed this needed to be significantly higher for the rest of the fiscal year to meet the revenue target. “Meanwhile, the fiscal consolidation achieved in the past couple of years has supported monetary policy in bringing inflation down and restoring overall macroeconomic stability,” it said, adding this had resulted in a significant improvement to the gross public debt to GDP ratio, declining it from 75 percent to 67.2 percent at end-June 2024.
On the inflationary outlook, the SBP credited the recent decline in core and headline inflation as resulting from contained demand; improved supplies of major food items; favorable global commodity prices; and a delay in upward adjustments in administered energy prices. “Core inflation is still high and consumers’ inflation expectations increased further in the latest survey,” it said, adding uncertainty persisted over the timing and magnitude of adjustments in administered energy prices, future course of global commodity prices, and any additional taxation measures to meet the shortfall in revenue collection.
“On balance, the [MPC] viewed a possibility of FY25 average inflation falling below the earlier forecast range of 11.5-13.5 percent. However, this assessment is contingent on achieving the targeted fiscal consolidation and timely realization of planned external inflows,” it said.