KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday slashed the policy rates by 200 basis points (bps) to 13pc.
SBP Governor Jameel Ahmad announced the policy decision after the MPC meeting.
“Headline inflation declined to 4.9 percent y/y in November 2024, in line with the MPC’s expectations. This deceleration was mainly driven by the continued decline in food inflation and the phasing out of the impact of the hike in gas tariffs in November 2023.
“However, the Committee noted that core inflation, at 9.7 percent, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile. To this effect, the Committee reiterated its previous assessment that inflation may remain volatile in the near term before stabilizing in the target range.
“At the same time, the growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity. Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting economic growth on a sustainable basis,” said the committee.
The committee noted the following key developments since its last meeting that may have implications for the macroeconomic outlook. First, the current account remained in surplus for the third consecutive month in October 2024, which, amidst weak financial inflows and substantial official debt repayments, helped increase the SBP’s FX reserves to around $12 billion.
Second, global commodity prices remained generally favourable, with positive spillovers on domestic inflation and the import bill. Third, credit to the private sector recorded a noticeable increase, broadly reflecting the impact of ease in financial conditions and banks’ efforts to meet the advances-to-deposit ratio (ADR) thresholds. Lastly, the shortfall in tax revenues from the target has widened.
Based on these developments, the committee assessed that the impact of the cumulative reduction in the policy rate from June 2024 is beginning to unfold and will continue to materialise over the next few quarters.
“In this context and taking into account today’s decision, the Committee noted that the real policy rate remains appropriately positive to stabilize inflation within the target range of 5 – 7 percent,” said the committee.
The committee had on Nov 4 reduced the key interest rate by 250 bps, taking it from 17.5pc to 15pc after a fourth successive cut since June.
The MPC noted that the strict regulations by the government played an important role in sustaining the downward trend in inflation.
LAUDBALE ECONOMIC MEASURES
Pragmatic steps by the government, including curb on illegal foreign-exchange trade, has boosted country’s foreign exchange reserves to a record high this fiscal.
The news website Bloomberg quoted the State Bank of Pakistan (SBP) data in its report on Pakistan that remittances from the overseas Pakistanis to their families rose 34pc to $14.8 billion in the first five months of the current financial year 2024-25 from a year ago.
The increase in remittance was the result of government’s crackdown on unofficial buying or selling of dollars as people started using the official banking channels for the purpose. The government’s action helped raise foreign exchange reserves to above $12 billion by November-end, the highest since March 2022.
It may be noted that the government had launched the crackdown on illicit dollar market and hoarders in September 2023 after reports of flight of greenback from the country. The Federal Investigation Agency (FIA) raided offices of currency dealers, arrested people and also deployed officials in plainclothes at money exchanges in its efforts to curb illicit trade.
Finance minister Muhammad Aurangzeb hopes that the government’s strategy will help increase remittances to an all-time high of $35 billion this year from $30 billion last year.
“The currency reforms do seem to have boosted remittances,” Bloomberg reported John Ashbourne, emerging-market economist at BMI, a Fitch Solutions company in London, as saying.
In Ashbourne’s opinion “the increase might be because remittances that had previously been sent using the black market are now being sent via official channels.”
The surge in remittances have helped Pakistan fill coffers with foreign exchange that reduces a major economic vulnerability that pushed the country to the brink of a default last year.
Pakistan has been implementing tough economic measures on the International Monetary Fund’s guidance and secured a $7 billion loan in September.
