Higher than market consensus: SBP reduces key policy rate by 250bps, takes it to 15%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday reduced the key interest rate by 250 basis points (bps), taking it from 17.5% to 15% after a fourth successive round of monetary easing that began in June 2024.

“At its meeting today, the MPC decided to cut the policy rate by 250bps to 15%, effective from November 5, 2024,” it said in the statement.

“The Committee noted inflation has declined faster than expected and has reached close to its medium-term target range in October.”

The Committee assessed that the tight monetary policy stance continues to play an important role in sustaining the downward trend in inflation.

MPC now expects the average inflation for FY25 to be significantly lower than its previous forecast range of 11.5-13.5%: SBP

“Moreover, a sharp decline in food inflation, favourable global oil prices and absence of expected adjustments in gas tariffs and petroleum development levy rates have accelerated the pace of disinflation in recent months.

“Taking into account the inherent risks associated with these factors, the MPC assessed that the near-term inflation may remain volatile before stabilising within the target range.”

The MPC added that the International Monetary Fund (IMF) programme has reduced uncertainty and improved the prospects for realisation of planned external inflows.

“Second, the surveys conducted in October showed an improvement in confidence and a reduction in inflation expectations of both consumers and businesses.

“Third, the secondary market yields on government securities and KIBOR have declined substantially. Fourth, tax collection during the first four months of FY25 fell short of target. Lastly, while the global oil prices have exhibited significant volatility amidst escalating geopolitical tensions, prices of metals and agricultural products have increased notably.

“Considering these developments, the MPC viewed the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the 5-7% target range. This will also support macroeconomic stability and help achieve economic growth on a sustainable basis.”

On the inflation front, the MPC said besides contained demand, improved domestic supply of key food commodities, benign global oil prices and favourable base effect accelerated the pace of disinflation in recent months.

“Continuation of these factors may bring inflation further down in the next few months. Moreover, underlying inflationary pressures continued to ease, as indicated by a relatively gradual decline in core inflation and moderation in inflation expectations.

“Considering these developments, the MPC now expects the average inflation for FY25 to be significantly lower than its previous forecast range of 11.5-13.5%. The Committee also assessed that this outlook is subject to multiple risks, such as escalation in the Middle East conflict, recurrence of food inflation pressures, ad hoc adjustments in administered prices and implementation of contingency taxation measures to meet shortfalls in revenue.”

In the external sector, the SBP said together with the realisation of planned official inflows, central bank-held reserves are expected to increase to around $13 billion by June 2025.

Background

In its previous meeting held on September 12, the MPC had unleashed its then-most aggressive cut in the key policy rate since April 2020, reducing it by 200bps to bring it down to 17.5% amid slowing inflation and declining international oil prices.

A majority of market experts had expected the SBP to continue with its monetary easing stance as slowing inflation trajectory fuelled expectations of a fourth-successive reduction.

Brokerage house Arif Habib Limited (AHL) anticipated a cut of 200bps. In its survey, AHL found that 61.1% of the respondents expected a reduction of 200bps, followed by 25% predicting a cut of 250bps, while 13.9% saw a 150bps reduction in the policy rate.

It added that 100% of respondents anticipated the SBP would lower the policy rate.

AKD Securities, another brokerage house, shared a similar view in its report.

Topline Securities also expected a rate cut of 200bps, similar to the cut of 200bps in the last monetary policy meeting.

Previous MPC meeting

In its previous meeting, the MPC had cut the key interest rate by 200bps, exceeding market expectations.

The MPC back then observed that “both headline and core inflation fell sharply over the past two months. The pace of this disinflation somewhat exceeded the MPC’s earlier expectations, mainly due to the delay in the implementation of planned increases in administered energy prices and favourable movement in global oil and food prices.”

Since the last MPC, several key developments on the economic front took place.

The rupee marginally appreciated by 0.03%, while petrol prices decreased nearly 11%.

Internationally, oil prices inched up since the last MPC and were hovering above $70 per barrel amid soft demand.

Pakistan’s headline inflation clocked in at 7.2% on a year-on-year basis in October 2024, slightly higher than the reading in September 2024 when it stood at 6.9%, showed Pakistan Bureau of Statistics (PBS) data.

In addition, the country’s current account posted a surplus of $119 million in September 2024 compared to a deficit of $218 million in the same month of the previous fiscal year. This was the second successive month of a current account surplus and the highest in magnitude since March 2024.

Foreign exchange reserves held by the SBP increased by $116 million on a weekly basis, clocking in at $11.16 billion as of October 25, data released on Thursday showed.

Total liquid foreign reserves held by the country stood at $16.05 billion. Net foreign reserves held by commercial banks stood at $4.89 billion.