The Monetary Policy Committee (MPC) reduced the policy rate by 250 basis points to 15%, effective November 5, 2024. This decision follows a faster-than-anticipated decline in inflation, aided by lower food inflation, stable oil prices, and no expected adjustments in gas tariffs and Petroleum Development Levy (PDL) rates.
This marks the fourth consecutive rate cut since early June this year, after maintaining a steep policy rate of 22% for a year.
The Monetary Policy Statement notes that;
IMF Program: The new IMF Extended Fund Facility (EFF) approval has improved external inflows and reduced uncertainty.
Market Yields and Inflation: Secondary market yields and the Karachi Interbank Offered Rate (KIBOR) have dropped, and October surveys showed improved consumer and business confidence alongside lower inflation expectations.
Fiscal Challenges: The government’s tax collection fell short of targets in the first quarter of FY25, though non-tax revenues, boosted by SBP profits, supported fiscal performance.
Real Sector: Economic activity is gradually recovering, with higher-than-expected production in rice and sugarcane. Growth in sectors like textile, food, and automobile is supported by increased imports of raw materials, improved business confidence, and relaxed financial conditions. The MPC expects GDP growth for FY25 to be between 2.5% and 3.5%.
External Sector: The current account showed a surplus in September, narrowing the Q1-FY25 deficit to $98 million, helped by remittances and exports. Foreign exchange reserves reached $11.2 billion as of October 25, 2024, with expectations of reaching $13 billion by June 2025.
Fiscal Sector: Surpluses in fiscal and primary balances were recorded in Q1-FY25, largely due to SBP profits. Lower interest payments also created fiscal space, though achieving the annual tax target remains challenging. The MPC emphasized fiscal reforms and broadening the tax base.
Money and Credit: Broad money growth was 15.2% year-on-year as of October 25, with increased credit to the private sector following government buy-backs of debt securities. This was partially enabled by the government’s reduced reliance on bank borrowing due to SBP profits.
Inflation: Inflation eased significantly, dropping to 7.2% in October from 9.6% in August, driven by controlled demand, stable food supply, favorable oil prices, and a base effect. Average inflation for FY25 is now forecasted to be below the previous estimate of 11.5-13.5%, though risks remain from potential conflicts, food inflation, and revenue shortfalls.
The SBP aims to maintain price stability, control inflation within a 5–7% range, and support sustainable growth while monitoring the potential risks that could affect this outlook.
https://www.sbp.org.pk/m_policy/2024/MPS-Nov-2024-Eng.pdf
