In a surprising move on Monday, the State Bank of Pakistan (SBP) announced a reduction in its key policy rate by 150 basis points, bringing it down to 20.5%. This decision comes ahead of the country’s annual budget for 2024-25 and marks the first rate cut in nearly four years. The central bank had maintained borrowing costs at a record 22% since June 2023.
Inflation and Monetary Policy
The Monetary Policy Committee (MPC) highlighted a significant decline in inflation since February, with the May figures surpassing earlier expectations. Core inflation also moderated, reflecting the tight monetary policy stance and fiscal consolidation efforts. Despite these positive trends, the MPC acknowledged potential risks to the near-term inflation outlook from upcoming budget measures and uncertainty regarding future energy price adjustments.
Economic and External Sector Developments
Real GDP growth remained moderate at 2.4% for FY24, with the agriculture sector showing strong performance, while industry and services sectors saw a subdued recovery. The current account deficit reduction has improved foreign exchange reserves to approximately $9 billion. The government’s approach to the IMF for an Extended Fund Facility program is expected to further bolster financial inflows and strengthen FX buffers.
Fiscal Sector and Money Supply
Fiscal indicators showed improvement, with the primary surplus increasing to 1.5% of GDP. The overall deficit remained stable, supported by increased tax rates, higher SBP profits, and lower energy sector subsidies. The broad money (M2) growth decelerated, reflecting the tight monetary policy stance, which has favorable implications for the inflation outlook.
Inflation Outlook
Headline inflation decelerated sharply to 11.8% in May from 17.3% in April, driven by declining prices of wheat, wheat flour, and other major food items, along with a downward adjustment in administered energy prices. Core inflation also saw a reduction. However, the MPC warned of potential inflation spikes in July due to budgetary measures and adjustments in electricity and gas tariffs.
Future Policy Directions
The MPC emphasized that future monetary policy decisions would be data-driven and responsive to evolving developments in the inflation outlook. The central bank remains focused on ensuring that inflation continues on a downward trajectory while supporting sustainable economic growth.
