Pakistan’s Monetary Policy Committee (MPC) has reduced the policy rate by 200 basis points, bringing it down to 13%, effective December 17, 2024. The decision, made during the December 16 meeting, reflects the Committee’s focus on supporting economic growth while managing inflationary pressures.
Headline inflation fell to 4.9% year-on-year in November 2024, aligning with the MPC’s expectations. This decline was primarily driven by reduced food inflation and the fading impact of the November 2023 gas tariff hike. However, core inflation remains a challenge at 9.7%, indicating persistent price pressures. Additionally, inflation expectations among consumers and businesses have shown volatility.
The MPC noted that inflation might remain unpredictable in the short term but is expected to stabilize within the target range of 5% to 7%. Growth indicators have shown positive momentum, providing a basis for cautious optimism. The Committee emphasized that its approach of gradual rate cuts is balancing inflation control with the need to support sustainable economic growth.
A surplus in the current account for the third consecutive month, with October 2024 marking another positive outcome, has contributed to the State Bank of Pakistan’s foreign exchange reserves reaching approximately $12 billion. Global commodity prices have remained favorable, benefiting domestic inflation and reducing the import bill. Private sector credit has also increased, reflecting eased financial conditions and banks’ efforts to meet advances-to-deposit ratio thresholds. However, the widening shortfall in tax revenues poses potential risks to the fiscal outlook.
The Committee highlighted improved prospects for economic growth, with real GDP for FY25 expected to be in the upper half of the projected 2.5% to 3.5% range. In agriculture, better-than-expected cotton arrivals and promising indicators for wheat crop sowing have mitigated earlier risks. The industrial sector continues to gain traction, with strong performance in key segments such as textiles, food, automobiles, petroleum, and tobacco. High-frequency indicators, including increased sales of cement, fertilizers, and vehicles, further support this positive trend.
The MPC also noted that reduced inflationary pressures and improved performance in agriculture and industry are expected to boost the services sector. Enhanced business confidence and relaxed financial conditions are likely to sustain economic activity in the coming quarters.
This reduction in the policy rate marks a significant step in the MPC’s strategy to foster economic stability while addressing inflation concerns. The cumulative rate cuts since June 2024 are beginning to show results, with their full impact anticipated to materialize in the months ahead. The Committee remains committed to maintaining a balanced approach, ensuring inflation stays within the target range while supporting growth across key sectors of the economy.