On Monday, the State Bank of Pakistan (SBP) revealed a 200 basis point reduction in its key policy rate, bringing it down from 15% to 13%, effective December 17, 2024. This decision follows a drop in the annual inflation rate to 4.9% in November, aligning with the central bank’s forecasts.
The reduction was announced after a meeting of the Monetary Policy Committee (MPC), which identified food inflation and the waning impact of last year’s gas tariff hikes as key factors in the inflation slowdown.
However, the MPC noted that core inflation remained elevated at 9.7%, while expectations around consumer and business inflation continued to fluctuate.
“This rate cut aims to foster economic growth while ensuring that inflation remains under control,” the MPC statement read.
The committee also pointed to encouraging economic trends, such as a rise in high-frequency economic activity indicators.
“We anticipate GDP growth for FY25 to fall within the upper half of the 2.5%-3.5% range,” the statement added, citing progress in agriculture and industry.
Since the previous meeting, the MPC highlighted several positive developments, including a current account surplus for the third consecutive month, which has helped raise foreign exchange reserves to around $12 billion. Additionally, private-sector credit has seen growth, signaling improved financial conditions.
Despite these positive signs, the committee emphasized challenges in the fiscal sector, with tax revenues failing to meet targets and significant efforts required to achieve annual revenue goals.
“Although broad money growth has slowed, the acceleration in private sector credit is aiding the ongoing recovery,” the MPC noted.
The SBP has revised its inflation forecast for FY25, now expecting it to remain below the previous range of 11.5%-13.5%. However, risks tied to core inflation and global commodity price fluctuations could impact the outlook.
