KARACHI: The State Bank of Pakistan (SBP) in a meeting held today the Monetary Policy Committee (MPC) decided to cut the policy rate by 200 bps to 17.5 percent, effective from September 13, 2024.
Both headline and core inflation fell sharply over the past two months.
The pace of this disinflation has somewhat exceeded the Committee’s earlier expectations, mainly due to the delay in the implementation of planned increases in administered energy prices and favourable movement in global oil and food prices. At the same time, the Committee acknowledged the inherent uncertainty related to these developments, which warranted a cautious monetary policy stance.
In this regard, the Committee underscored the importance of the tight monetary policy stance in driving the sustained decline in inflation over the past year.
The MPC noted that global oil prices have fallen sharply, though they remain volatile while SBP’s FX reserves are around $9.5 billion as of September 6, despite weak official FX inflows and continued debt repayments.
The state bank in a statement issued said market yields of government securities have declined noticeably since the last MPC meeting. Fourth, inflation expectations and confidence of businesses have improved in the latest pulse surveys, while those of consumers have worsened slightly.
The FBR tax collection during July-August 2024 was lower than the target.
Taking into account these developments as well as the potential risks to the inflation outlook and today’s decision, the MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5 – 7 percent and help ensure macroeconomic stability.
Real Sector
Recent high-frequency sales indicators reflect a moderate pick up in the economic activity. Domestic cement and POL sales (excluding furnace oil) increased by 8.5 percent and 6.8 percent on m/m basis in August, respectively.
Latest business sentiment surveys also support this assessment of a moderate pickup, as manufacturing firms reported increased capacity utilization during the past couple of waves. At the same time, the MPC noted that the outlook for the agriculture sector has weakened.
This is attributed to an expected shortfall in cotton production from the government’s target, given the decline in area under cultivation and a substantial drop in cotton arrivals by end-August 2024.
