In a pivotal move, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has reduced the key policy rate by 100 basis points, bringing it down to 12%.
This decision marks the sixth consecutive rate cut since June 2024, when the policy rate stood at a staggering 22%. The new rate is effective as of January 28, 2025, signaling continued efforts to stimulate economic growth while managing inflationary pressures.
The MPC's statement emphasized that the decision aligns with declining inflation trends and a cautious assessment of the economic landscape.
Inflation dropped to 4.1% year-on-year (y/y) in December 2024, supported by moderate domestic demand and favorable supply-side dynamics.
A Closer Look at the MPC Decision
- Inflation Trends:
- Headline inflation continued to decline, primarily due to a favorable base effect, stability in exchange rates, and downward adjustments in energy tariffs.
- Core inflation, while easing, remains elevated, indicating persistent underlying pressures.
- Economic Activity:
- High-frequency indicators suggested gradual improvements in economic activity, signaling that the impact of the 1,000 basis points (bps) reduction in the policy rate since June 2024 is unfolding as expected.
- Forward-Looking Approach:
- The MPC highlighted the importance of maintaining a positive real policy rate on a forward-looking basis to stabilize inflation within the target range of 5-7%.
- GDP Growth: Real GDP growth in Q1-FY25 was slightly below earlier projections, reflecting cautious economic recovery.
- Current Account Surplus: Pakistan’s current account recorded a surplus of $582 million in December 2024, marking the fifth consecutive month of surplus.
- Foreign Exchange Reserves: FX reserves held by the SBP declined by $276 million to $11.45 billion as of January 17, 2025, amidst low financial inflows and high debt repayments.
- Tax Revenue: While tax revenues saw a notable increase in December, they remained below target for H1-FY25.
Market Sentiment and Expectations
The decision to cut the policy rate by 100 bps was largely anticipated by market analysts and financial institutions. Key surveys conducted prior to the announcement reflected widespread consensus:
- JS Global Survey: 79% of participants predicted a 100bps cut.
- Arif Habib Limited (AHL): 68.4% of respondents expected a reduction of 100bps, with smaller groups forecasting larger cuts.
- CFA Society Survey: 75% anticipated a 100bps cut, with the remainder predicting reductions of up to 200bps.
This broad agreement underscores the market’s confidence in the SBP's efforts to balance inflation control with economic growth.
- Volatile Global Oil Prices:
- Fluctuations in global oil markets remain a significant concern. Oil prices recently surged above $79 per barrel, adding to inflationary risks.
- Uncertain Policy Environments:
- Both domestic and international policy environments exhibit uncertainty, necessitating a cautious approach to monetary adjustments.
- Fiscal Challenges:
- Revenue generation remains below target, posing challenges to fiscal consolidation and debt management.
- Energy Tariff Adjustments:
- Future adjustments in energy tariffs could exert upward pressure on inflation.
- Ensuring price stability.
- Supporting sustainable economic growth.
- Keeping inflation within the 5.5-7.5% range for FY25.
Comparison with Previous Meeting
The committee also emphasized that it will closely monitor key developments, including global commodity prices, domestic fiscal measures, and the broader economic environment, to inform its decisions.
At its December 16, 2024 meeting, the MPC reduced the policy rate by 200 bps, bringing it down to 13%. Key highlights from that meeting included:
- Improved growth prospects, reflected in high-frequency economic indicators.
- A cautious approach to policy adjustments to balance inflationary pressures and external account stability.
Since then, the following notable changes have occurred:
- The rupee depreciated by 0.2%.
- Petrol prices increased by 1.6%.
- Inflation fell from 4.9% in November to 4.1% in December.
