The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) reduced the policy rate by 200 basis points to 17.5%, citing a faster-than-expected decline in both headline and core inflation due to delayed energy price hikes and favorable global oil and food prices.
This marks the third consecutive rate cut after maintaining a steep policy rate of 22% for a year.
Key developments include falling global oil prices, stable foreign exchange reserves of $9.5 billion, improved inflation expectations, and declining government security yields. However, the agricultural sector faces challenges, particularly in cotton production.
The MPC expects real GDP growth for FY25 to remain between 2.5% and 3.5%. Workers' remittances and export earnings have improved, while the current account deficit is contained within 0-1% of GDP. Fiscal consolidation has improved Pakistan's debt-to-GDP ratio, falling to 67.2%. However, to meet fiscal targets, tax collection must increase significantly for the remainder of the fiscal year.
Broad money growth has decelerated, while private sector credit growth remains subdued but may pick up as financial conditions ease. Inflation has dropped to 9.6% in August 2024 from 12.6% in June, though core inflation remains elevated. The inflation outlook is positive, but risks remain due to potential energy price adjustments, global commodity price changes, and fiscal challenges.
The policy rate has retreated from its historic high of 22% where it remained perched for an year. See note on previous MPC meeting.