KEY POINTS
- Headline inflation decreases to 4.9% year-on-year in November 2024.
- Growth prospects improve, with indicators showing stronger economic activity.
- The SBP expects inflation to stay lower than its previous forecast of 11.5%-13.5 % for FY25.
KARACHI: The State Bank of Pakistan (SBP) on Monday reduced its key policy rate by 200 basis points (bps) to 13% from 15%. This is the fifth successive reduction since June 2024 when the rate stood at 22%.
“At its meeting, the Monetary Policy Committee (MPC) decided to cut the policy rate by 200 bps to 13%, effective from December 17, 2024,” the MPC said in its statement.
“Headline inflation declined to 4.9% y/y in November 2024, in line with the MPC’s expectations. This deceleration was mainly driven by the continued decline in food inflation as well as the phasing out of the impact of the hike in gas tariffs in November 2023.
“However, the Committee noted that core inflation, at 9.7%, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile. To this effect, the Committee reiterated its previous assessment that inflation may remain volatile in the near term before stabilizing in the target range,” it added.
“At the same time, growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity,” the statement added.
“Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting economic growth on a sustainable basis,” the statement said.
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The MPC noted that the current account remained in surplus for the third consecutive month in October 2024, which, amidst weak financial inflows and substantial official debt repayments, helped increase the SBP’s FX reserves to around $12 billion.
“Second, global commodity prices remained generally favourable, with positive spillovers on domestic inflation and the import bill. Third, credit to the private sector recorded a noticeable increase, broadly reflecting the impact of ease in financial conditions and banks’ efforts to meet the advances-to-deposit ratio (ADR) thresholds. Lastly, the shortfall in tax revenues from the target has widened,” the statement added.
“Based on these developments, the Committee assessed that the impact of the cumulative reduction in the policy rate from June 2024 is beginning to unfold and will continue to materialize over the next few quarters. In this context and taking into account today’s decision, the Committee noted that the real policy rate remains appropriately positive to stabilize inflation within the target range of 5–7 percent,” it said.
In its previous meeting held on November 04, the MPC had cut the key policy rate by 250bps to bring it down to 15%.
Despite these positive signs, challenges remain, especially in the fiscal sector. Tax revenues have fallen short of targets, and substantial efforts will be needed to meet annual revenue goals.
“While the broad money growth has slowed, credit to the private sector has accelerated, contributing to the ongoing economic recovery,” the MPC said.
The SBP expects inflation to stay lower than its previous forecast of 11.5%-13.5 % for FY25, although core inflation risks and global commodity price fluctuations may affect the outlook.
