Islamabad: In a significant move, the Monetary Policy Committee (MPC) of the State Bank of Pakistan has decided to reduce the policy rate by 200 basis points, bringing it down to 17.5 percent starting September 13, 2024. This decision comes as both headline and core inflation have experienced a sharp decline over the last two months, surpassing the Committee’s initial expectations. The reduction in inflation has been attributed to delayed increases in administered energy prices and positive trends in global oil and food prices.
According to State Bank of Pakistan, the MPC meeting highlighted several critical economic indicators that influenced their decision. Notably, global oil prices have decreased considerably, although they continue to be volatile. Additionally, the State Bank of Pakistan’s foreign exchange reserves stood at approximately $9.5 billion as of September 6, despite limited official foreign exchange inflows and ongoing debt repayments. The meeting also noted improvements in business confidence and a decline in government security yields since their last gathering.
Furthermore, the Committee took into account several domestic and international economic factors, including a moderate uptick in high-frequency sales indicators and robust workers’ remittance inflows. These elements have contributed to a contained current account deficit, which, along with anticipated inflows from the International Monetary Fund, is expected to bolster the bank’s foreign exchange reserves moving forward.
In the real sector, there has been a moderate increase in economic activities, with notable rises in domestic cement and POL sales. However, the outlook for the agriculture sector appears less optimistic due to anticipated shortfalls in cotton production. On the fiscal front, tax collection has shown a significant year-on-year increase, but meeting the annual target will require a substantial acceleration in revenue collection in the upcoming months.
The MPC also revised its inflation outlook, noting a decline to 9.6 percent in August 2024 from 12.6 percent in June 2024. This decrease in inflation is seen as a result of controlled demand and improved supply conditions. However, core inflation remains high, and the near-term outlook is subject to risks, including potential adjustments in energy prices and the global commodity price trajectory.
Overall, the MPC’s policy adjustments and ongoing economic assessments aim to ensure macroeconomic stability and achieve sustainable economic growth, targeting an inflation range of 5 – 7 percent over the medium term.