In a notable development, the State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) announced a significant reduction in the key policy rate by 150 basis points, bringing it down to 20.5%. This is the first rate cut in four years, reflecting a response to easing inflationary pressures and an effort to stimulate economic activity. The decision, effective from June 11, 2024, follows the recent decline in consumer price index (CPI) inflation to 11.8% in May from a historic high of 38% the previous year.
Economic Context and Impact
The SBP’s move aligns with the recent global trend where central banks, including those in Canada and England, have initiated rate cuts. According to analysts, this rate reduction is expected to benefit various sectors including cement, power, textile, chemical, and automotive industries. Mustafa Pasha, Chief Investment Officer at Lakson Investments, anticipates muted short-term market impact but foresees further aggressive cuts by September, potentially bringing the rate down to 16-17% by year-end. He highlighted the central bank’s current favorable conditions of stable currency and lower inflation.
The MPC emphasized that the decision was influenced by the significant subsiding of inflationary pressures. Core inflation and consumer expectations have shown a downward trend, which the committee believes will continue. However, they warned of potential risks associated with upcoming budgetary measures and future energy price adjustments, which might cause a temporary spike in inflation around July 2024. The MPC remains optimistic that the overall inflation rate will gradually decrease during FY25.
External and Fiscal Sectors
The current account deficit has seen a remarkable reduction, contributing to improved foreign exchange reserves, now approximately $9 billion. Robust growth in remittances and exports, along with a decrease in imports, played a crucial role. Workers’ remittances reached a record $3.2 billion in May 2024, further stabilizing the financial position. The MPC stressed the importance of timely financial inflows and fiscal consolidation, including broadening the tax base and reforming public sector enterprises, to ensure long-term economic stability.
Real GDP growth was moderate at 2.4% in FY24, driven primarily by strong performance in agriculture and a partial recovery in the industrial sector. Despite a challenging economic environment, provisional estimates suggest that the economy is gradually recovering, with expectations of continued moderate growth in FY25. The MPC noted that structural reforms and stabilization policies would be crucial in sustaining this recovery.
Future Outlook
The SBP’s rate cut, though significant, is seen as a balanced approach to supporting economic growth while keeping inflation in check. Analysts, including Asad Ali Shah and Khurram Schehzad, lauded the decision, calling it a bold move ahead of the budget announcement and potential new IMF programs. They emphasized that despite the cut, the policy rate remains relatively high, which aligns with the IMF’s stance on maintaining a tight monetary policy.
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Overall, the SBP’s latest monetary policy decision reflects a strategic effort to balance inflation control with economic stimulus, setting the stage for potentially more rate cuts and continued fiscal reforms in the coming months.