SBP Reduces Policy Rate By 250 Bps To 15 %

The State Bank of Pakistan (SBP) Monday slashed the policy rate by 250 basis points to 15 percent owing to faster than expected decline in inflation, expanding foreign reserves and better prospects of commodity-producing sector

KARACHI, (UrduPoint / Pakistan Point News - 4th Nov, 2024) The State Bank of Pakistan (SBP) Monday slashed the policy rate by 250 basis points to 15 percent owing to faster than expected decline in inflation, expanding foreign reserves and better prospects of commodity-producing sectors.

The Monetary Policy Committee (MPC) of the central bank, according to a statement issued here, reviewed key economic indicators and developments taken place during previous two month and decided to cut the policy rate for the fourth consecutive time since June 2024.

The Committee noting fast declining inflation that has reached close to its medium-term target range in October and important role of tight monetary policy stance in it, assessed that sharp decline in food inflation, favourable global oil prices and absence of expected adjustments in gas tariffs and PDL rates have accelerated the pace of disinflation in recent months but due to associated risks the near-term inflation may remain volatile before stabilizing within the target range.

The MPC observed that approval of new EFF program for Pakistan by IMF Board has reduced uncertainty and improved the prospects for realization of planned external inflows while the surveys conducted in October showed an improvement in confidence and a reduction in inflation expectations of both consumers and businesses.

The secondary market yields on government securities and KIBOR have declined substantially and tax collection during the first four months of FY25 fell short of target while on the global level oil prices have exhibited significant volatility amidst escalating geopolitical tensions and prices of metals and agricultural products have increased notably.

Considering the developments, the Committee viewed “the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the 5 – 7 percent target range.” This will also support macroeconomic stability and help achieve economic growth on a sustainable basis, the committee noted.

The latest real sector data showed a gradual pick-up in economic activity as the initial estimates of major Kharif crops turned out better than the MPC’s earlier expectations and higher-than-targeted estimates of rice and sugarcane production have more than offset the estimated shortfall in maize and cotton output.

The MPC noted further traction in industrial activity, particularly significant growth in textile, food, automobile and allied industries during July-August 2024 with expectations of further momentum in the coming months.

Increasing imports of raw materials and machinery, improving business confidence, and easing financial conditions support the assessment while better prospects of commodity-producing sectors and easing inflationary pressures to support services sector as well, the MPC said and anticipated that real GDP growth in FY25 to be better than its earlier assessment, while remaining in the range of 2.5 to 3.5%.

In the External Sector, the current account posted a surplus for the second consecutive month in September 2024; narrowing the cumulative deficit to $98 million in Q1-FY25. Despite a substantial increase in imports, robust workers' remittances and higher exports helped contain the deficit while foreign investment recorded a slight uptick in September.

These developments, along with receipt of the first tranche under the IMF program, helped in further build-up of SBP’s FX reserves to $11.2 billion as on October 25, 2024, MPC noted assessing that relatively higher workers’ remittances and exports will help keep the current account deficit within the projected range of 0 to 1% of GDP despite pick up in imports. “This, together with the realization of planned official inflows, is expected to increase the SBP’s FX reserves to around $13 billion by June 2025,” the committee added.

Record high SBP profits and subsequent increase in non-tax revenue contributed in improving the Fiscal sector and during Q1-FY25, the fiscal and primary balances posted surpluses of 1.4% and 2.4 % of GDP, respectively while the FBR tax collection, in contrast, fell short of target during July-October, the MPC noted and stressed on need of higher growth for achieving the FY25 tax target.

Despite of sizable fiscal space created by lower interest payments, meeting the targeted primary balance would be challenging, the MPC cautioned and emphasized the importance of continued fiscal consolidation to support macroeconomic stability. The committee also reiterated the need for fiscal reforms, focusing on broadening the tax base and curtailing PSEs’ losses.

The broad money (M2) growth increased slightly to 15.2% with noticeable changes in its composition and the net budgetary borrowing from the banking system declined considerably while banks’ credit to the non-government sector increased.

After the receipt of SBP profit, the government reduced its borrowing from banks and also initiated buy-back operations of its outstanding debt securities while SBP’s liquidity injections reduced significantly and deposits remained the major drives of M2 growth, the MPC observed.

During the period, additional room had created for banks to extend credit to the private sector and MPC viewed that demand for private sector credit may further pick up with easing financial conditions and expected increase in economic activity. The banks, in the coming weeks, may also extend advances to avoid additional tax on non-compliance of Advances-to-Deposit ratio (ADR) thresholds, it added.

The headline inflation on yearly basis dropped to 6.9% in September and recorded as 7.2% in October while improved domestic supply of key food commodities besides contained demand, benign global oil prices and favourable base effect accelerated the pace of disinflation in recent months, the MPC observed and noted that continuation of these factors may bring inflation further down in the next few months.

“Considering these developments, the MPC now expects the average inflation for FY25 to be significantly lower than its previous forecast range of 11.5 – 13.5 percent,” the Committee said and also assessed that this outlook was subject to multiple risks, such as escalation in the Middle East conflict, recurrence of food inflation pressures, ad hoc adjustments in administered prices and implementation of contingency taxation measures to meet shortfalls in revenue.