The State Bank of Pakistan (SBP) announced a major cut in its policy rate on December 16, 2024. The Monetary Policy Committee (MPC) reduced the rate by 200 basis points, bringing it down to 13%. The decision will take effect from December 17, 2024.
Inflation Eases to 4.9%
Headline inflation dropped to 4.9% year-on-year in November 2024. The decrease aligns with the MPC’s expectations. Lower food inflation and the fading impact of last year’s gas tariff hike drove the decline. However, core inflation remains stubborn at 9.7%.
The MPC acknowledged that inflation may stay volatile before stabilizing. Despite this, the Committee is optimistic about controlling inflation within the target range of 5-7% in the coming months.
Growth Prospects Improve
Economic growth indicators showed positive momentum. Agriculture gained support from better-than-expected cotton arrivals and promising wheat sowing data. The industrial sector continues to thrive, with significant activity in textiles, automobiles, and food production. Cement, auto, and fertilizer sales also reflect improved industrial performance.
The MPC now expects GDP growth in FY25 to reach the upper half of the 2.5-3.5% range. Improved business confidence and eased financial conditions are driving these gains.
Current Account Surplus for Third Month
The current account surplus extended for a third consecutive month in October 2024. Strong export performance, led by high-value textiles and rice, contributed to this trend. Workers’ remittances also stayed robust, thanks to improved exchange rate stability.
SBP’s foreign exchange reserves rose to $12 billion. Officials expect these reserves to exceed $13 billion by June 2025. The current account deficit for FY25 is likely to remain between 0-1% of GDP.
Fiscal Challenges Persist
Tax revenue fell short of targets, despite a 23% year-on-year increase in FBR collections during July-November FY25. The shortfall could hinder fiscal consolidation goals.
On the expenditure side, lower interest payments on domestic debt are providing some relief. However, achieving the primary surplus target will require additional revenue measures. The MPC stressed the need for fiscal reforms to broaden the tax base.
Lending to Private Sector Grows
Private sector borrowing surged as financial conditions eased. Credit to businesses and consumer financing rose significantly in October 2024. Banks worked to meet the Advances-to-Deposit Ratio (ADR) thresholds by year-end.
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Broad money growth slowed to 13.9% in November, mainly due to reduced government borrowing. Deposits remained the key driver of money supply, though the currency-to-deposit ratio edged higher.
Inflation Outlook Brightens
The MPC revised its FY25 inflation forecast downward. Average inflation is now expected to fall well below the earlier projection of 11.5-13.5%. The decline stems from a favorable base effect, falling food prices, and benign global commodity markets.
However, risks persist. These include potential revenue measures, food inflation spikes, and rising global commodity prices. The MPC remains cautious but confident that the current monetary policy will stabilize inflation in the target range.
SBP’s Focus on Stability
The MPC highlighted the gradual impact of recent rate cuts. It emphasized that the positive real policy rate would help stabilize inflation while supporting growth. With improving economic indicators, SBP aims to strike a balance between curbing inflation and fostering sustainable economic development.
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