Home Latest News State Bank of Pakistan Reduces Policy Rate by 150 Basis Points

State Bank of Pakistan Reduces Policy Rate by 150 Basis Points

Monetary Policy Committee meeting decides to reduce interest rate to 20.5% amidst higher than expected decline in inflation

by Staff Report

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The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday decided to cut the policy rate by 150 basis points to 20.5 percent in light of a “significant decline” in inflation since February, especially the “better than anticipated” figures from May.

In a statement issued after the meeting, the central bank said the MPC had assessed that “underlying inflationary pressures” were also subsiding amidst tight monetary policy stance, supported by fiscal consolidation. “This is reflected by continued moderation in core inflation and ease in inflation expectations of both consumers and businesses in the latest surveys,” it said, while noting “some upside risks” persisted to the near-term inflation outlook due to upcoming budgetary measures and uncertainty regarding future energy price adjustments.

Referring to the May inflation of 11.8%–down from 17.3% in April—the MPC said this reflected the continued tight monetary policy stance as well as a “sizeable” decline in prices of wheat, wheat flour, and some other major food items, along with the downward adjustment in administered energy prices. “Core inflation also decelerated to 14.2% from 15.6%,” it said, while warning the near-term inflation outlook was susceptible to risks emanating from the FY25 budgetary measures and future adjustments in electricity and gas tariffs.

“The MPC foresees a risk of inflation to rise significantly in July 2024 from current levels, before trending down gradually during FY25,” it warned, adding sharp wheat price reductions have historically proved to be temporary.

According to the central bank, real GDP growth has remained moderate at 2.4% in the ongoing fiscal year as per provisional data, with subdued recovery in industry and services partially offsetting the strong growth in agriculture. It noted the reduction in the current account deficit had helped improve foreign exchange reserves to roughly $9 billion despite large debt repayments and weak official inflows. It said it expected financial inflows to improve after the government entered an Extended Fund Facility with the IMF. It also cited a decline in international oil prices and slight increase in prices of non-oil commodities.

“Based on these developments, the [MPC] on balance, viewed that it is now an appropriate time to reduce the policy rate,” read the statement, noting “the real interest rate” still remained significantly positive, with an aim to guide inflation to the medium-term target of 5-7 percent.

On the real sector, the MPC’s estimates showed real GDP growth at 2.1% in the third quarter of the ongoing fiscal compared to a contraction of 1.1% in the same period last year. It said industry had also witnessed positive growth in the third quarter, adding initial growth estimates for the first two quarters were revised upward.

It said that for the next fiscal year, the MPC expects economic growth to remain moderate owing to anticipated moderation in agriculture output and ongoing stabilization policies.

In the external sector, the MPC noted the current account surplus for the third consecutive month in April thanks to growth in remittances and exports, offsetting an uptick in imports. It said the current account deficit had narrowed to $202 million during July-April of the ongoing fiscal year, while exports had grown by 10.6%. “Conversely, imports decreased by 5.3% during the same period due to lower international commodity prices, better domestic agriculture output and moderate economic activity,” it added.

The MPC also noted “robust” workers’ remittances in recent months, reaching an all-time high of $3.2 billion in May 2024. “The resultant lower current account deficit, along with improved FDI and the disbursement of SBA tranche in April, has facilitated ongoing large debt repayments and supported the SBP’s FX reserves,” it said. The MPC stressed on timely mobilization of financial inflows for external financing requirements to further strengthen FX buffers and allow country to effectively respond to any external shocks and support sustainable economic growth.

While praising the improvement of fiscal indictors during July-March, the SBP noted “limited progress” in addressing structural weaknesses to broaden the tax base and initiate energy sector reforms. In light of this, it said, the upcoming budget was expected to be largely rate-based. “In this backdrop, the Committee emphasized that fiscal consolidation through broadening the tax base and reforming loss-making public sector enterprises would help achieve fiscal sustainability on a more durable basis,” it said, adding this was essential to encourage declining inflation and contain external account pressures.

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