The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) made a significant decision on November 4, 2024, to cut the policy rate by 250 basis points, bringing it down to 15.0%. This move reflects the central bank’s confidence in the country’s improving inflation outlook and aims to provide much-needed support to businesses and economic growth.
Decline in Inflation Spurs Rate Cut
The MPC’s decision was primarily driven by a faster-than-expected decline in inflation, which has now reached its medium-term target range. Key factors contributing to this decline include the impact of tight monetary policy, a sharp reduction in food inflation, favorable global oil prices, stable gas tariffs, and low petroleum development levy (PDL) rates. These factors have collectively alleviated inflationary pressures, paving the way for a policy rate adjustment.
Monetary Aggregates and Fiscal Developments
Between July 1 and October 25 of FY2025, the country’s money supply (M2) experienced a contraction of 1.9%, equivalent to a reduction of Rs. 707.8 billion, compared to a contraction of 1.3% (Rs. 399.2 billion) in the same period last year. Within the monetary aggregates, Net Foreign Assets (NFA) rose by Rs. 53.3 billion, though this was lower than the Rs. 232.4 billion increase recorded last year. Conversely, Net Domestic Assets (NDA) of the banking sector decreased by Rs. 761.1 billion, compared to a decline of Rs. 631.7 billion last year.
The government made substantial progress in fiscal consolidation by retiring Rs. 1,866.8 billion in borrowing for budgetary support, a stark contrast to the borrowing of Rs. 753.2 billion in the same period last year. Encouragingly, private sector credit activity also showed a positive trend, with borrowing amounting to Rs. 447.1 billion, a significant turnaround from the retirement of Rs. 153.5 billion in the previous year.
Stock Market on the Rise
The Karachi Stock Exchange (KSE-100) index demonstrated robust performance in October 2024, closing the month at an impressive 88,967 points. This marked a gain of 7,853 points, reflecting growing investor confidence in the economy. Market capitalization surged by Rs. 917 billion during the month, reaching Rs. 11,536 billion by the end of October.
The stock market’s bullish trend underscores the positive sentiment surrounding Pakistan’s economic outlook, driven by policy rate adjustments, declining inflation, and improved fiscal discipline.
Outlook
The MPC’s decision to cut the policy rate is expected to further enhance business confidence, stimulate private sector borrowing, and support investment. With inflationary pressures easing and economic indicators showing signs of recovery, Pakistan’s financial markets are likely to maintain their positive momentum in the months ahead.
The combination of prudent monetary policy, fiscal discipline, and improved market conditions signals a steady path toward economic stabilization and growth. As businesses and investors capitalize on these favorable conditions, Pakistan’s economy appears poised for sustained improvement.