SBP Slashes Interest Rate by 2% to 17.5%

Karachi-(Business Reporter)-The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) decided to cut the policy rate by 200 basis points to 17.5% effective September 13, 2024. This decision was made in light of the sharp decline in both headline and core inflation over the past two months, exceeding the Committee’s earlier expectations.

The MPC attributed the decline in inflation to the delay in implementing planned increases in administered energy prices and favorable global oil and food prices. However, the Committee acknowledged the uncertainty related to these developments, warranting a cautious monetary policy stance.

The MPC noted that global oil prices have fallen sharply, though they remain volatile, and SBP’s foreign exchange reserves stand at around $9.5 billion as of September 6. Market yields of government securities have declined noticeably since the last MPC meeting.

Inflation expectations and business confidence have improved, while consumer confidence has worsened slightly. The MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5-7% and ensure macroeconomic stability.

The MPC observed a moderate pickup in economic activity, with high-frequency sales indicators showing an increase in domestic cement and POL sales. Business sentiment surveys also support this assessment.

However, the outlook for the agriculture sector has weakened due to an expected shortfall in cotton production. The MPC expects the continued ease in inflationary pressures and the impact of recent policy rate cuts to support growth prospects in the industry and services sectors.

The MPC noted that the current account deficit contained at $0.2 billion in July 2024, thanks to elevated workers’ remittance inflows and improved export earnings. The global macroeconomic environment has turned favorable, with softening crude oil prices and easing global financial conditions.

Going forward, import volumes are expected to increase, but the improvement in the country’s terms of trade and robust workers’ remittances are expected to keep the current account deficit within the projected range of 0-1% of GDP in FY25.

The MPC emphasized the need for fiscal consolidation to continue through reforms aimed at broadening the tax base and curtailing public sector enterprise losses. This would create additional space for social and development spending.

The MPC viewed that the planned official foreign exchange inflows will be critical for the government to reduce its reliance on the domestic banking sector, improve the net foreign assets, and create space for lending to the private sector.