The State Bank of Pakistan (SBP) has announced a significant reduction in the interest rate, lowering it by 200 basis points to 17.5%, effective from September 13, 2024. This decision marks the third consecutive rate cut by the central bank, which has cumulatively reduced the policy rate by 450 basis points over its last three monetary policy meetings.
The announcement came through an official press release following a meeting of the SBP’s Monetary Policy Committee (MPC). The SBP highlighted a notable decline in both headline and core inflation over the past two months, which exceeded the committee’s previous expectations. This disinflationary trend was primarily driven by delays in planned increases in administered energy prices and favorable movements in global oil and food prices.
Despite the positive inflationary trends, the MPC underscored the importance of maintaining a cautious monetary policy stance due to the inherent uncertainties surrounding these developments. The committee emphasized that a tight monetary policy has been crucial in sustaining the decline in inflation observed over the past year.
Key developments noted by the MPC since its last meeting include a sharp decline in global oil prices, which, although volatile, has contributed to a favorable macroeconomic environment. As of September 6, SBP’s foreign exchange reserves stood at approximately $9.5 billion, despite weak official FX inflows and ongoing debt repayments. Additionally, secondary market yields on government securities have decreased, and while inflation expectations and business confidence have improved, consumer sentiment has slightly worsened. The Federal Board of Revenue (FBR) tax collection for July-August 2024 also fell short of targets.
Considering these factors, the MPC deemed the real interest rate to be adequately positive, aiming to bring inflation down to the medium-term target range of 5–7% and ensure macroeconomic stability. This adjustment is expected to support sustainable economic growth over the medium term.
In terms of real sector performance, high-frequency sales indicators show a moderate increase in economic activity. Domestic cement sales rose by 8.5% and POL sales (excluding furnace oil) by 6.8% on a month-to-month basis in August. Business sentiment surveys indicate increased capacity utilization in manufacturing firms. However, the agricultural sector faces challenges, including a projected shortfall in cotton production and a decline in cotton arrivals.
On the external front, July 2024 saw strong workers’ remittance inflows and improved export earnings, which helped mitigate an increase in imports and contained the current account deficit to $0.2 billion. This positive trend continued in August, supported by favorable global conditions such as falling crude oil prices. The import volumes are expected to rise in line with domestic economic recovery, while stable export earnings are anticipated to offset reductions in rice exports. The current account deficit is projected to remain within the 0–1% range of GDP for FY25, bolstered by robust remittances and planned IMF program inflows.
In the fiscal sector, FBR tax collection grew by 20.5% during July-August FY25. However, achieving the fiscal year’s revenue target will require a significant acceleration in tax collection rates. The fiscal consolidation efforts of recent years have contributed to a notable reduction in the gross public debt-to-GDP ratio, from 75% at the end of June 2023 to 67.2% by the end of June 2024. Ongoing fiscal reforms are expected to further support social and development spending.
Regarding money and credit, broad money (M2) growth decelerated to 14.6% by the end of August 2024, down from 16.1% at the end of June. The growth in reserve money has somewhat reversed but remains below historical trends. The MPC emphasized that planned official FX inflows are crucial for reducing reliance on domestic banking and creating space for private sector lending.
Inflation outlook remains cautiously optimistic, with headline inflation easing to 9.6% in August 2024 from 12.6% in June. Core inflation also declined to 11.9% from 14.1%. The MPC anticipates the average inflation for FY25 could fall below the earlier forecast range of 11.5–13.5%, provided fiscal consolidation targets are met and planned external inflows are realized.
Overall, the SBP’s interest rate cut reflects a strategic move to support economic stability and growth, addressing both current inflationary pressures and fostering a favorable environment for future development.