Islamabad: The Monetary Policy Committee (MPC) of the State Bank of Pakistan has reduced the policy rate by 100 basis points to 19.5 percent, effective from July 30, 2024, citing better-than-expected inflation figures for June and an improving external account.
According to State Bank of Pakistan, the decision was influenced by a series of positive economic developments, including a decline in the current account deficit and a significant increase in foreign exchange reserves. The MPC noted that these factors, combined with a positive real interest rate, provided the flexibility to lower the policy rate to support economic activity without adding to inflationary pressures.
The Committee highlighted several key factors in its review, including a sharp reduction in the current account deficit in FY24, bolstered foreign exchange reserves, and the initiation of a 37-month Extended Fund Facility (EFF) program with the IMF worth about $7.0 billion. Despite recent global volatility in oil prices and easing metal and food prices, domestic inflation expectations and business confidence have worsened.
Real sector indicators suggest moderate economic growth with significant contributions from the apparel sector in large-scale manufacturing and expected slowing in agriculture growth rates. For FY25, the MPC projects real GDP growth between 2.5 to 3.5 percent.
Externally, despite recent deficits, the current account balance has improved significantly, supported by strong remittances and export growth, with forecasts suggesting a contained deficit between 0 and 1.0 percent of GDP for FY25. Fiscal improvements were also noted, with a shift to a primary surplus and a reduced overall deficit, though concerns were raised about the increased reliance on domestic bank financing.
Monetary trends indicate consistent alignment with the tight monetary policy stance, with broad money growth lagging behind nominal GDP growth, suggesting favorable conditions for controlling inflation.
The inflation outlook for FY25 is set between 11.5 and 13.5 percent, a marked reduction from the previous year’s average of 23.4 percent, contingent on sustained fiscal consolidation and the absence of unanticipated fiscal or energy price shocks.