Karachi: The Monetary Policy Committee (MPC) has announced a significant reduction in the policy rate by 250 basis points, setting it at 15 percent, effective from November 5, 2024. This decision comes as inflation has decreased at a faster pace than anticipated, nearing its medium-term target range in October. The MPC attributes this trend to a stringent monetary policy, a drop in food inflation, favorable global oil prices, and the absence of expected adjustments in gas tariffs and PDL rates, though it cautions that inflation may remain volatile in the short term.
According to State Bank of Pakistan, the MPC highlighted several key developments impacting the macroeconomic outlook. These include the approval of Pakistan’s new Extended Fund Facility (EFF) program by the IMF Board, enhancing prospects for external inflows, improved confidence and reduced inflation expectations among consumers and businesses, and a decline in secondary market yields on government securities. However, tax collection fell short of targets, and global oil prices have shown volatility alongside notable increases in metal and agricultural product prices.
The committee considers the current monetary policy as suitable for maintaining price stability and supporting sustainable economic growth. Economic activity is gradually picking up, with better-than-expected Kharif crop estimates and industrial growth, particularly in textile, food, and automobile sectors, driven by increasing imports of raw materials and machinery. The MPC projects real GDP growth for FY25 to be between 2.5 and 3.5 percent.
The external sector showed a current account surplus for the second straight month in September, with a narrowing cumulative deficit and an increase in SBP’s foreign exchange reserves. While imports are expected to rise, the MPC anticipates that higher remittances and exports will help manage the current account deficit within the projected range.
Fiscal balances showed surpluses in the first quarter of FY25, thanks to high SBP profits boosting non-tax revenues, despite falling short on tax collection targets. The MPC emphasizes the need for fiscal reforms to support macroeconomic stability.
Broad money growth saw a slight increase, with changes in its composition due to reduced government borrowing from banks. The MPC expects private sector credit demand to rise with easing financial conditions.
Inflation has eased significantly, falling close to its medium-term target range. The MPC now expects average inflation for FY25 to be lower than previously forecasted, though it remains cautious of potential risks such as geopolitical tensions and food inflation pressures.