KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to reduce the policy rate by 100 basis points (bps), bringing it down to 12 percent, effective from January 28, 2025 due to continuous decline in inflation and the positive momentum in economic activity.
Addressing a press conference following the committee meeting on Monday at the SBP head office, Governor Jameel Ahmed highlighted that key economic indicators are moving in the right direction.
The current account is in surplus, home remittance inflows are rising, exports are improving, and inflation is on a downward trajectory. Given these developments, the committee has opted to further lower the policy rate to support continued economic growth, he said.
“The cumulative reduction in the policy rate since June 2024 now stands at 1000 basis points, and we anticipate this will further bolster economic activity in the coming months,” he added.
He further noted that both the current account and inflation projections have significantly improved. The current account is now expected to move from a 0.5 percent deficit to a 1 percent surplus by the end of FY25.
Additionally, inflation is projected to fall within the range of 5.5 to 7.5 percent by the end of the fiscal year, a substantial improvement compared to earlier forecasts.
Going forward, Governor SBP said that inflation outlook is subject to risks emanating from volatile global commodity prices, protectionist policies in major economies, timing and magnitude of administered energy tariff adjustments, volatile perishable food prices, as well as any additional measures to meet the revenue target.
Moreover, he informed that the business confidence index has continued to show positive sentiments and the MPC expects economic activity to gain further traction and real GDP growth to remain in the earlier projected range of 2.5-3.5 percent.
In addition, despite the challenges posed by high debt repayments, foreign exchange reserves are anticipated to remain around $13 billion by the end of FY25, he added.
Governor SBP said that inflation continued to trend downward in line with expectations, reaching 4.1 percent YoY in December and this trend is driven by moderate domestic demand conditions and supportive supply-side dynamics, amidst favorable base effects.
Inflation is expected to come down further in January before inching up in the subsequent months.
The Committee also noted that core inflation, while continuing to ease, is still at an elevated level. At the same time, high frequency indicators continued to show gradual improvement in economic activity, he added.
Key developments since its last meeting are: first, real GDP growth in Q1-FY25 turned out slightly lower than the MPC’s earlier expectations. Second, the current account remained in surplus in December 2024, though the SBP’s FX reserves declined amidst low financial inflows and high debt repayments.
Third, despite a substantial increase in December, tax revenues remained below target in H1-FY25. Fourth, global oil prices have exhibited heightened volatility over the past few weeks.
And lastly, the global economic policy environment has become more uncertain, prompting central banks to adopt a cautious approach.
“Considering these developments and evolving risks, the Committee viewed that a cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth,” Jameel Ahmed said.
In this regard, he said that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5-7 percent.
He said that headline inflation remained on its downward trajectory and eased to 4.1 percent y/y in December from 4.9 percent in November.
The declining trend in inflation is mainly led by the downward adjustment in electricity tariffs; adequate supply of key food items leading to low level of food inflation; stability in exchange rate; and favorable base effect, he mentioned.
Underlying inflationary pressures-as indicated by core inflation-also moderated amidst contained domestic demand, though these remain elevated. Moreover, inflation expectations also remained volatile.
Based on these trends, Governor said that the MPC reiterated its earlier assessment that the near-term inflation will remain volatile and is expected to increase close to the upper bound of the target range towards the end of FY25.
On balance, the MPC expects headline inflation for FY25 to average between 5.5-7.5 percent, he added.
According to the Monetary Policy Statement issued by SBP, the latest high frequency indicators depicted continuing momentum in economic activity. This is reflected by a notable increase in automobile, POL and fertilizer sales, as well as in import volumes, electricity generation and credit disbursement to the private sector.
However, the provisional data of real GDP for Q1-FY25 showed a modest growth of 0.9 percent against 2.3 percent growth recorded in Q1-FY24 due to sharp deceleration in agriculture sector growth to 1.2 percent in Q1-FY25, from 8.1 percent in the same period last year.
However, the latest available information for wheat crop, including satellite images, are also pointing towards a relatively modest output.
Meanwhile, the decline in industrial sector growth in Q1-FY25 moderated relative to last year.
The MPC noted that the downtrend in LSM, which has been pulling down industrial growth, has been driven by a few low-weight items, such as furniture.
In contrast, key industrial sectors, such as textile, food and beverages, and automobiles, have shown noticeable improvement.
Driven by strong workers’ remittances and export earnings, the current account posted a surplus of $0.6 billion in December, bringing the cumulative surplus to $1.2 billion during H1-FY25.
Led by HVA textile, exports maintained a strong momentum. At the same time, import growth also showed broad-based acceleration on the back of higher volumes, pointing towards improvement in economic activity.
While the import bill outpaced export earnings, remittances inflows more than offset the widening trade deficit. Based on these trends, particularly the robust workers’ remittances, the outlook for the current account balance has improved considerably and is now expected to remain between a surplus and a deficit of 0.5 percent of GDP in FY25.
Meanwhile, net financial inflows, though tepid during H1-FY25, are expected to improve going forward as a sizable part of official debt repayments has already been made.
Consequently, the improved current account outlook, along with the expected realization of planned financial inflows, is likely to increase the SBP’s FX reserves beyond $13 billion by June 2025.
FBR revenues recorded a notable increase of around 26 percent during H1-FY25. However, the shortfall in tax collection from the target has widened. Accordingly, a steep acceleration in tax revenue growth would be required to achieve the annual target.
The Committee viewed that the anticipated lower interest payments than the budgeted amount is likely to contain the overall fiscal deficit around its target. However, achieving the target for the primary balance would be challenging.
The broad money (M2) growth decelerated further to 11.3 percent y/y as on January 17, compared to 13.3 percent at the time of the last MPC meeting. The decline in M2 growth came primarily on account of a significant deceleration in the NDA growth.
While the government’s borrowing from the banking system remained relatively contained and shifted to non-bank sources, banks’ credit to the private sector grew sharply. This was mainly on account of the ongoing economic recovery, ease in financial conditions, and aggressive efforts by banks to meet the advances to deposit ratio (ADR) thresholds.
These factors also had an impact on bank deposits, which have declined noticeably since the last MPC meeting; whereas some increase in currency in circulation was also noted during this period.
Reuters adds: Fourteen of 15 analysts surveyed by Reuters expected the central bank to cut its key rate by at least 100 bps mainly due to weaker inflation.
Pakistan’s consumer inflation rate fell to 4.1% in December, its lowest in more than six years, helped by favourable base effects. That was below the government’s forecast and down from a multi-decade high of around 40% in May 2023.
The bank maintained its forecast of full-year GDP growth at 2.5%-3.5% and predicted faster growth would help boost the country’s previously struggling foreign exchange reserves.
“The improved current account outlook, along with the expected realization of planned financial inflows, is likely to increase the SBP’s FX reserves beyond $13 billion by June 2025,” the bank’s statement said.
Pakistan posted a current account surplus of $0.6 billion in December, bringing the cumulative surplus to $1.2 billion for the first half of the current fiscal year, the bank said, adding the outlook for the current account balance had improved considerably.
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