By Pakistan’s Central Bank Continues Easing Monetary Policy
The State Bank of Pakistan (SBP) has reduced its key policy rate by 200 basis points (bps) to 13%, marking the fifth consecutive cut since June 2024 when the rate was at 22%. The new policy rate will take effect from December 17, 2024, signaling continued easing of the country’s monetary stance.
Key Developments and Inflation Insights
The Monetary Policy Committee (MPC) stated that headline inflation fell to 4.9% year-on-year (y/y) in November 2024, in line with their expectations. This decline was primarily due to the drop in food inflation and the diminishing effects of the gas tariff hike in November 2023.
However, the committee also highlighted that core inflation remained persistent at 9.7%, with inflation expectations among consumers and businesses continuing to be volatile. The MPC emphasized that inflation may remain unpredictable in the short term before stabilizing within the target range of 5–7%.
Economic Growth and External Pressures
Despite inflation concerns, the growth outlook has shown some improvement, evidenced by recent upticks in high-frequency economic indicators. The MPC believes that its strategy of measured policy rate cuts is helping balance inflationary pressures and external account challenges, while fostering sustainable economic growth.
Positive Economic Developments
- Current Account Surplus: The current account posted a surplus for the third consecutive month in October 2024, contributing to an increase in SBP foreign exchange reserves, which now stand at $12 billion.
- Favorable Global Commodity Prices: Positive global commodity price trends have eased domestic inflation and reduced the import bill.
- Credit Expansion: There has been a significant increase in private sector credit, driven by the easing of financial conditions and banks meeting their advances-to-deposit ratio (ADR) targets.
Tax Revenue Shortfall and Future Outlook
The MPC noted that the tax revenue shortfall has widened beyond targets. However, the committee remains optimistic that the cumulative impact of its rate cuts since June will continue to support economic recovery over the next few quarters.
The real policy rate remains positive, with the MPC aiming to stabilize inflation within its target range of 5–7%.
Market Reactions and Expert Predictions
Most market experts had anticipated a monetary easing approach by the SBP, as the slowing inflation rate fueled expectations for a fifth consecutive rate cut. Brokerage houses such as Topline Securities and Arif Habib Limited (AHL) predicted a 200bps cut.
Khurram Schehzad, the newly-appointed Advisor to Finance Minister on Economic and Financial Reforms, noted that the decelerating inflation rate would lead to further monetary easing, reducing the cost of capital for businesses and improving the government’s fiscal balance.
Previous Economic Trends and Current Position
In the November 2024 MPC meeting, the SBP had already reduced the policy rate by 250bps. Since then, the Pakistani rupee depreciated slightly by 0.1%, and petrol prices increased by 1.5%.
On the international front, oil prices have slightly decreased, hovering above $70 per barrel amid subdued demand.
As of December 6, 2024, SBP foreign exchange reserves stood at $12.05 billion, while the country’s total liquid reserves were at $16.60 billion. Commercial banks held $4.55 billion in net foreign reserves.
Conclusion
The SBP’s monetary easing stance reflects a commitment to balancing inflation management, supporting economic growth, and addressing external account pressures. The continued interest rate cuts are expected to positively impact the cost of capital for businesses and government fiscal health in the coming months.
