SBP Cuts Policy Rate by 250 bps, Marking Progress in Inflation Reduction
The State Bank of Pakistan (SBP) has announced a significant reduction in its policy rate, cutting it by 250 basis points to 15%. This decision, effective from November 5, comes as inflationary pressures ease and economic prospects improve.
Overview of Policy Rate Adjustment
Key Factors Leading to the Decision
The SBP’s Monetary Policy Committee (MPC) noted a considerable decrease in inflation, which neared the central bank’s medium-term target in October. The easing of inflationary pressures has been attributed to several key factors:
- Stable Food Prices: A reduction in the volatility of food prices has played a crucial role.
- Favourable Global Oil Conditions: Lower oil prices on the global market have alleviated some inflationary pressures.
- Minimal Domestic Tariff Adjustments: Limited increases in domestic tariffs have helped maintain price stability.
Inflation Trends and Projections
While inflation volatility is expected to persist, the MPC anticipates stabilisation within the 5–7% target range over the near term. The central bank’s revised inflation outlook for FY25 has been adjusted to below the previous forecast range of 11.5%–13.5%, reflecting reduced core inflation and improving domestic supply conditions.
Economic Developments and Outlook
Impact of IMF Extended Fund Facility
The approval of Pakistan’s Extended Fund Facility by the International Monetary Fund (IMF) has significantly boosted economic confidence, leading to planned external inflows. This development, coupled with improved investor sentiment and lower government yields, has supported the MPC’s decision to cut the policy rate.
Sectoral Growth and Real GDP Projections
Positive trends in Pakistan’s real sector have been observed, with notable growth in industries such as textiles, food, and automobiles. The agricultural sector has also shown strength, with a stronger-than-expected Kharif crop output bolstering economic confidence.
The SBP expects real GDP growth for FY25 to range between 2.5% and 3.5%, reflecting these positive trends.
External Sector Performance
Current Account and Foreign Reserves
On the external front, the current account posted a surplus for the second consecutive month in September, driven by strong remittances and exports. Despite increased imports, SBP foreign reserves reached $11.2 billion by late October, with further increases projected in the coming months.
Potential Risks and Considerations
While the outlook is positive, potential risks remain, including tensions in the Middle East and ad hoc fiscal adjustments. These factors could impact the stability and progress achieved so far.
ALSO READ:
https://flarenews.pk/2024/11/03/counter-terrorism-operation-in-balochistan-three-terrorists-killed/
FAQs
What prompted the State Bank of Pakistan to cut the policy rate?
The SBP cut the policy rate due to easing inflationary pressures, stable food prices, favourable global oil conditions, and minimal adjustments in domestic tariffs. Additionally, positive economic developments such as the approval of Pakistan’s Extended Fund Facility by the IMF boosted economic confidence.
How will the reduction in the policy rate affect inflation?
The reduction in the policy rate is expected to support economic growth while maintaining inflation within the target range of 5–7%. The SBP anticipates that core inflation will continue to decrease, contributing to overall price stability.
What impact will this decision have on the real sector of the economy?
The decision is expected to positively impact the real sector, with continued growth in industries like textiles, food, and automobiles. The agricultural sector, which has already shown strength with a robust Kharif crop output, is also expected to benefit.
How are Pakistan’s foreign reserves performing?
Pakistan’s foreign reserves reached $11.2 billion by late October, with further increases projected in the coming months. This improvement is attributed to strong remittances and exports, despite increased imports.
What are the potential risks to the economic outlook?
Potential risks include tensions in the Middle East and ad hoc fiscal adjustments, which could impact economic stability. The SBP is monitoring these factors closely to mitigate any adverse effects.
