KARACHI, Dec 16 (APP): The central bank’s Monetary Policy Committee, Monday, further reduced the policy rate by 200 bps to 13 percent, owing to continued decline in inflation and improved growth prospects, marking a fifth consecutive cut in the basic rate.
The MPC of the State Bank of Pakistan viewed the continued decline in food inflation as well as the phasing out of the impact of the hike in gas tariffs in November 2023 as major contributory factors in decline of inflation whereas Headline inflation shrunk to 4.9 % in November 2024, a SBP statement issued following the MPC meeting here stated.
Based on recent economic developments, the Committee assessed that the impact of the cumulative reduction in the policy rate from June 2024 is beginning to unfold and will continue to materialize over the next few quarters. In this context and taking into account the day’s decision. The Committee termed the real policy rate appropriately positive to stabilize inflation within the target range of 5 to 7 %.
The inflationary declaration was in line with the MPC’s expectations, however, the Committee remained cautious about volatility in inflation in the near term before stabilizing in the target range. “Core inflation, at 9.7 percent, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile,” the MPC evaluated.
Noting the improved growth prospects, reflected by the recent uptick in high-frequency indicators of economic activity, the Committee argued that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check, while supporting economic growth on a sustainable basis.
The surplus current account for the third consecutive month in October 2024 helped SBP’s FX reserves to surge around $12 billion amidst weak financial inflows and substantial official debt repayments while positive spill over of favorable global commodity prices on domestic inflation and the import bill, the committee observed while reviewing the key economic developments since its last meeting.
The noticeable increase in credit to the private sector broadly reflecting the impact of ease in financial conditions and banks’ efforts to meet the advances-to-deposit ratio (ADR) thresholds but the shortfall in tax revenues from the target has widened, the MPC found.
The FY25 inflation to average substantially below its earlier forecast range of 11.5 – 13.5 percent while core inflation declined marginally in November, and consumers’ inflation expectations inched up further, the committee noted and also pointed out “The inflation outlook is susceptible to multiple risks, including additional measures to meet the revenue shortfall, resurgence in food inflation and an increase in global commodity prices.
The incoming data of the Real Sector indicated improved prospects for economic growth as, in the agriculture sector downside risks to the overall crop outlook have somewhat subsided while activity in the industrial sector is gaining further traction as well.
“Key large-scale manufacturing sectors – such as textile, food, automobiles, POL and tobacco – were already depicting strong growth till Q1-FY25. Moreover, the latest high-frequency indicators – such as domestic sales of cement, auto, fertilizer and POL products,” it noted and suggested that this momentum in industrial activity is continuing.
The knock-on impact of these improved prospects for the commodity-producing sectors and reduced inflationary pressures would support the services sector as well. Going forward, improving business confidence and easing financial conditions are expected to support economic growth. Considering these developments, the MPC expects the real GDP growth in FY25 to remain in the upper half of the projected range of 2.5 to 3.5% .
Improvement in current account continued, during July-October, FY25, driven by robust workers’ remittances and strong export performance while exports grew by 8.7 percent, mainly driven by HVA textile, rice and POL exports. Besides, favorable global commodity prices helped containing the import bill despite a sizeable increase in import volumes, it said.
The MPC anticipates that sustained trends to keep the current account deficit near the lower bound of the projected 0 to 1% of GDP range in FY25 as well as enable the SBP’s FX reserves to exceed $13.0 billion by June 2025.
In the fiscal Sector, committee reviewed improvements in both the overall and primary balances during Q1-FY25. FBR revenues, though grew by 23%, need more growth and additional measures to achieve the annual tax collection target, the committee stressed and highlighted the importance of fiscal reforms to broaden the tax base for achieving the targeted fiscal consolidation.
The MPC also viewed decelerated broad money (M2) growth primarily stemmed from NDA of the banking system while the contribution of NFA in overall M2 growth increased with lending to private sector and non-bank financial institutions due to easing financial conditions and compliance measures.
Credit to private sector businesses and consumer financing increased in October 2024 while the currency-to- deposit ratio increased slightly.
The rate reduction made by the MPC will be effective from December 17, 2024, the statement maintained.