Islamabad, Dec 16: The State Bank of Pakistan (SBP) announced a 200 basis point reduction in its policy interest rate, bringing it down to 13%, effective from December 17, 2024. This move marks the fifth consecutive rate cut by the central bank, which has reduced the rate by a total of 900 basis points over the last five monetary policy meetings.
The decision was made after a meeting of the SBP’s Monetary Policy Committee (MPC), which acknowledged a decline in headline inflation to 4.9% year-on-year in November 2024, in line with expectations. The drop was mainly attributed to a continued fall in food inflation and the waning impact of last year’s gas tariff hikes. However, core inflation remained sticky at 9.7%, with inflation expectations remaining volatile.
The MPC noted that despite inflationary pressures, the growth outlook has improved, with positive developments in economic activity, such as a rise in high-frequency indicators. The committee assessed that the series of measured interest rate cuts was helping to balance inflation control with economic growth.
Key developments since the last MPC meeting included a continued surplus in the current account for the third consecutive month, an uptick in private sector credit, and favorable global commodity prices that have helped manage domestic inflation and the import bill. However, tax revenue shortfalls remained a concern.
The MPC remains cautiously optimistic about economic growth prospects. For FY25, real GDP growth is expected to remain between 2.5% and 3.5%. The agriculture sector has shown improvement, with better-than-expected cotton arrivals and promising signs for wheat sowing. Additionally, key large-scale manufacturing sectors like textiles, automobiles, and food are showing strong growth, bolstering overall industrial activity.
Externally, the current account surplus, driven by strong exports and remittances, has helped boost foreign exchange reserves to around $12 billion. The outlook for FY25 suggests that the current account deficit will remain within the range of 0–1% of GDP.
Despite fiscal challenges, such as widening tax revenue gaps, the MPC anticipates a manageable fiscal deficit, supported by lower domestic debt interest payments. The committee also highlighted that the ongoing monetary easing, along with improving business confidence and financial conditions, should support sustainable economic growth moving forward.
On the inflation front, the SBP revised its forecast for FY25, now expecting inflation to average lower than the previously forecast range of 11.5–13.5%. While risks remain particularly from potential tax measures and global commodity price fluctuations the central bank’s stance is viewed as conducive to stabilizing inflation within the target range of 5–7%.
