KARACHI, Jun 10 (APP): The State Bank of Pakistan (SBP) on Monday slashed the policy rate by 150 basis points to 20.5 percent owing to subsiding inflationary pressure and ease in inflation expectations amid tight policy stance that was also supported by fiscal consolidation and administrative measures by government.

“The reduced policy rate of 20.5 % will be effective from June 11, 2024,” the SBP said in its monetary policy statement issued after the meeting of Monetary Policy Committee (MPC).

The MPC found decline in inflation since February broadly in line with expectations and May out turn better than earlier anticipation and assessed that underlying inflationary pressures were subsiding as reflected by continued moderation in core inflation and ease in inflation expectations of both consumers and businesses in the latest surveys.

The committee viewed some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments noting that “the cumulative impact of the earlier monetary tightening is expected to keep inflationary pressures in check.”

While reviewing key development, the MPC noted that the real GDP growth remained moderate at 2.4% in FY24 as per provisional data, reduced current account deficit helped improve the foreign exchange reserves to around $9 billion despite large debt repayments while the government has also approached the IMF for an Extended Fund Facility Programme, which was likely to unlock financial inflows that would help in further building up of FX buffers.

The committee noted that international oil prices have declined, whereas non-oil commodity prices have continued to inch up.

The committee terming it an appropriate time for reducing the policy rate on basis of recent developments, noted that the real interest rate was still significantly positive which was important to continue guiding inflation to the medium-term target of 5 to 7 %.

It also emphasized that the future monetary policy decisions would remain data-driven and responsive to evolving developments related to the inflation outlook.

The committee observed that latest estimates indicate real GDP growth at 2.1 percent in Q3-FY24, agriculture was already showing strong growth and industry also witnessed positive growth in Q3 while initial growth estimates for both Q1 and Q2 for FY24 were revised upward.

Taking into account the developments in the first nine months, FY24 growth was provisionally estimated by PBS at 2.4 percent against a contraction of 0.2 percent in FY23 while almost two-thirds of this recovery was explained by improvement in the agriculture sector, the MPC observed and assessed that the developments were in line with its earlier expectations.

The MPC anticipated that economic growth would remain moderate in FY25 due to the impact of expected moderation in agriculture output and ongoing stabilization policies
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In the External Sector, current account posted a surplus for the third consecutive month in April on the back of robust growth in remittances and exports offsetting the uptick in imports.

During July-April FY24, the CAD narrowed to $202 million and exports grew by 10.6% while imports decreased by 5.3%, the MPC noted adding that Workers’ remittances also remained robust in recent months, reaching an all-time high of $3.2 billion in May 2024.

“The resultant lower current account deficit, along with improved FDI and the disbursement of SBA tranche in April, has facilitated ongoing large debt repayments and supported the SBP’s FX reserves, the committee assessed and stressed that timely mobilization of financial inflows is essential to meet the external financing requirements and further strengthen FX buffers for the country to effectively respond to any external shocks and support sustainable economic growth.

The MPC observed that fiscal indicators continued to show improvement during July-March FY24 as the primary surplus increased to 1.5% of GDP, while the overall deficit remained almost at last year’s level mainly due to impact of increase in tax and PDL rates, higher SBP profit, and lower energy sector subsidies.

“The fiscal consolidation through broadening the tax base and reforming loss-making public sector enterprises would help achieve fiscal sustainability on a more durable basis,” the committee emphasized and added that it was also imperative to keep inflation on a downward trajectory and contain external account pressures.

The MPC noted that broad money (M2) growth decelerated to 15.2% y/y on May 24, 2024 from 17.1% as of end-March 2024, the growth contribution of net foreign assets in M2 remained positive and from the liability side deposits remained the mainstay in M2 growth, while currency in circulation growth decelerated.

As a result, reserve money growth observed a steep decline from 10% to 4.3% during the period, the MPC noted adding that the developments in monetary aggregates were consistent with the tight monetary policy stance and had favorable implications for the inflation outlook.

The committee observed that Headline inflation decelerated to 11.8% in May 2024 from 17.3 percent in April and Core inflation also decelerated to 14.2% from 15.6 %. Besides the continued tight monetary policy stance, the sharp reduction was also driven by a sizeable decline in prices of wheat, wheat flour, and some other major food items, along with the downward adjustment in administered energy prices.

The MPC foresaw a risk of inflation to rise significantly in July 2024 from current levels, before trending down gradually during FY25 and also observed that sharp wheat price reductions have historically proved to be temporary.