ISLAMABAD: On Monday, the State Bank of Pakistan (SBP) announced a significant reduction in its key policy rate by 250 basis points, bringing it down to 15%. This marks the fourth consecutive rate cut since June 2024, totaling a 700 basis point decrease. The decision comes as inflation shows signs of easing, providing policymakers with the flexibility to adopt a more accommodative monetary stance aimed at stimulating economic growth.
Inflation and Monetary Policy
Pakistan’s annual inflation rate edged up to 7.2% in October from 6.9% in September, but real interest rates remain notably positive. This is critical for guiding inflation toward the SBP’s medium-term target. The International Monetary Fund (IMF) has adjusted its inflation forecasts for Pakistan, now expecting an average consumer price increase of 9.5% in FY25, down from a previous estimate of 12.7%.
The SBP’s Monetary Policy Committee (MPC) emphasized that the faster-than-expected decline in inflation, along with significant drops in food inflation and stable global oil prices, has contributed to this easing trend. Despite the recent uptick in inflation, the MPC believes that a tight monetary policy remains essential for sustaining this downward trajectory.
Key Economic Developments
- IMF Program Approval: The recent approval of Pakistan’s Extended Fund Facility (EFF) by the IMF has reduced uncertainties and improved expectations for external inflows, crucial for economic stability.
- Business Confidence: Surveys from October indicated a rise in consumer and business confidence, along with declining inflation expectations, which bodes well for future economic activity.
- Government Securities Yields: Secondary market yields on government securities and Karachi Interbank Offered Rate (KIBOR) have significantly decreased, indicating improved financial conditions.
- Fiscal Performance: The fiscal balance showed a surplus of 1.4% of GDP in Q1-FY25, primarily due to record SBP profits. However, tax collection fell short of targets, highlighting the need for stronger fiscal measures.
Real Sector Insights
Recent data suggests a gradual recovery in economic activity, particularly within the agriculture sector, where initial estimates for Kharif crops, such as rice and sugarcane, exceeded expectations. Industrial sectors, including textiles and automobiles, are also showing growth, supported by increased imports of raw materials and improved business conditions.
The MPC revised its expectations for real GDP growth in FY25, forecasting it to be better than earlier assessments, remaining within the range of 2.5% to 3.5%.
External Sector Overview
The current account has shown improvement, posting a surplus for the second consecutive month in September, narrowing the cumulative deficit to $98 million for Q1-FY25. Robust workers’ remittances and higher exports have helped mitigate the impact of rising imports, and the SBP’s foreign exchange reserves have increased to $11.2 billion as of October 25, 2024.
Looking Ahead
The MPC expressed cautious optimism about the outlook for inflation and economic growth. However, it acknowledged that near-term inflation could remain volatile, influenced by various risks, including geopolitical tensions and potential fluctuations in food prices.
The SBP’s focus on maintaining price stability within the 5–7% target range, combined with efforts for fiscal consolidation and structural reforms, is essential for achieving sustainable economic growth in Pakistan.
