The State Bank of Pakistan (SBP) has cut its policy rate by 200 basis points, bringing it down to 13%, effective December 17, 2024. The highly anticipated decision, announced during the Monetary Policy Committee (MPC) meeting, reflects confidence in easing inflationary pressures and improving economic prospects.
This is the fifth consecutive cut by the SBP, which has cut the rate by 900 basis points cumulatively in the last five monetary policy meetings. The real interest rate after this rate cut now stands at 810 basis points compared to earlier 1010 basis points.
Inflation expectations
Headline inflation eased to 4.9% year-on-year in November, primarily due to a continued decline in food inflation and the fading impact of the November 2023 gas tariff hike. However, in its statement, MPC highlighted concerns over core inflation, which remains elevated at 9.7%, and noted that inflation expectations among consumers and businesses remain volatile. Despite these risks, the central bank expects inflation to stabilise within its target range of 5-7% over the medium term. SBP believes that fiscal year 2025 average inflation will fall below the earlier disclosed range of 11.5-13.5%. The exact range of inflation will be disclosed in January 2025.
Improving economy
The MPC also emphasised recent economic improvements. In agriculture, better-than-expected cotton arrivals and encouraging early data on wheat sowing have improved crop outlooks. Similarly, the industrial sector has shown growth, with key industries like textiles, food, and automobiles performing strongly. High-frequency indicators, such as sales of cement and fertilisers, suggest sustained momentum in economic activity.
The SBP now forecasts GDP growth for FY25 to reach the upper half of the projected 2.5–3.5% range.
On the external front, the current account surplus, supported by strong exports and workers’ remittances, has helped build foreign exchange reserves, which now stand at $12 billion. In its post MPC meeting, the Governor remarked that, reserves would be well above
the target level of $13 billion by June 2025.
Exports grew by 8.7% during July-October FY25, led by high-value-added textiles and rice, while favourable global commodity prices contained the import bill despite increased import volumes. The Governor expects higher current account surplus in November 2024.
The MPC acknowledged fiscal challenges, including a widening shortfall in tax revenues. While FBR revenues grew by 23% year-on-year during July-November FY25, this falls short of the growth needed to meet annual targets. On the expenditure side, declining yields on domestic debt are expected to lower interest payments, partially offsetting the revenue shortfall.
The SBP also noted that credit to the private sector has increased substantially, reflecting the easing of financial conditions. While overall money supply growth slowed slightly, consumer financing and private-sector lending recorded significant gains.
Looking ahead, the SBP reiterated its cautious approach to monetary easing, stressing that the real policy rate remains appropriately positive to ensure inflation stability while supporting economic growth.
