SBP Slashes Policy Rate By 200bps To 17.5%

The State Bank of Pakistan, Thursday, slashed policy rate by 200 basis points to 17.5 percent owing to sharply declining inflation and moderate pick up in the economic activity during the past months

KARACHI, (UrduPoint / Pakistan Point News - 12th Sep, 2024) The State Bank of Pakistan, Thursday, slashed policy rate by 200 basis points to 17.5 percent owing to sharply declining inflation and moderate pick up in the economic activity during the past months.

The central bank, in the monetary policy statement issued here, informed that the Monetary Policy Committee (MPC) reviewed overall economic and financial situation and decided to decrease the policy rate to 17.5 percent effective from September 13, 2024.

The MPC observed that both headline and core inflation fell sharply over the past two months with a disinflation pace exceeding the committee’s expectations, mainly due to the delay in the implementation of planned increases in administered energy prices and favorable movement in global oil and food prices.

The inherent uncertainty related to these developments warranted a cautious monetary policy stance, the committee acknowledged and underscored the importance of the tight monetary policy stance in driving the sustained decline in inflation over the past year.

The MPC also reviewed key developments since its last meeting that have implications for the macroeconomic outlook including sharp decline in global oil prices, stability in SBP’s FX reserves despite weak official inflows and continued debt repayments, decline in secondary market yields of government securities, improved inflation expectations and confidence of businesses and lower than target tax collection by FBR during July-August 2024.

Taking into account these developments as well as the potential risks to the inflation outlook and the latest rate cut decision, the MPC assessed that the real interest rate will still remain adequately positive to bring inflation down to the medium-term target of 5 to 7 % and help ensure macroeconomic stability.

Taking stock of developments in the Real Sector the MPC observed that recent high-frequency sales indicators reflected a moderate pick up in the economic activity as domestic cement and POL sales increased in August while manufacturing firms reported increased capacity utilization. The latest business sentiment surveys also support the assessment of a moderate pickup, it added.

The MPC noted that the outlook for the agriculture sector has weakened due to an expected shortfall in cotton production but the continued ease in inflationary pressures and the unfolding impact of recent policy rate cuts will support the growth prospects in the industry and services sectors. “On balance, therefore, the real GDP growth outlook remained in line with the MPC’s earlier assessment of 2.5 – 3.5 percent for FY25,” it added.

In the External Sector, robust trend in workers’ remittance inflows in July and August 2024 and a substantial improvement in export earnings offset an increase in imports and helped contain the current account deficit to $0.2 billion while the global macroeconomic environment also turned favorable, the committee noted.

The ongoing domestic economic recovery might result into increase in import volumes but improvement in the country’s terms of trade, stability in export earning as well as robust workers’ remittances were expected to contain the overall trade deficit within the projected range of below 1% of GDP in FY25, the MPC anticipated and viewed “This contained current account deficit, along with the realization of inflows planned under the IMF program, will help further strengthen SBP’s FX reserves.”

The Committee while noting that FBR tax collection grew by 20.5% during July-August FY25 stressed on the need of increasing the pace of tax collection in the remaining months of FY25 to meet the revenue target for the fiscal year.

The fiscal consolidation in the past couple of years has helped bringing inflation down and restoring overall macroeconomic stability and the gross public debt to GDP ratio has declined to 67.2% at end-June 2024, the committee noted and expected creation of additional space for social and development spending in result of continued fiscal consolidation through reforms aimed primarily at broadening of tax base and curtailing PSE losses (particularly by addressing energy sector issues).

The broad money (M2) growth decelerated to 14.6% as of end-August 2024 due to more than seasonal retirements in private sector credit (PSC) and commodity operations financing, and reserve money growth, after remaining subdued during FY24, somewhat reversed while from the liability side, deposits remained the mainstay of M2 growth.

The MPC emphasized the significance of planned official FX inflows in reducing government’s reliance on the domestic banking sector, improve the NFA, and create space for lending to the private sector. The MPC also viewed that the currently subdued growth in PSC may pick up with the ease in financial conditions.

Maintaining its downward trajectory, headline inflation eased to single digit to 9.6% in August 2024 while core inflation declined to 11.9%, the Committee observed and assessed that this decline reflected the impact of contained demand, reinforced by improved supplies of major food items, favourable global commodity prices and delay in upward adjustments in administered energy prices.

The MPC also assessed susceptibility of the near-term inflation outlook to some risks as core inflation was still high and consumers’ inflation expectations increased further in the latest survey and remarked that there was an uncertainty stemming from the timing and magnitude of adjustments in administered energy prices, future course of global commodity prices, and any additional taxation measures to meet the shortfall in revenue collection.

The Committee, however, viewed a possibility of FY25 average inflation falling below the earlier forecast range of 11.5 to 13.5% but the assessment was contingent on achieving the targeted fiscal consolidation and timely realization of planned external inflows.