SBP slashes policy rate by 200bps to 13%

The State Bank of Pakistan (SBP) announced on Monday a 200 basis points (bps) reduction in its key policy rate, lowering it from 15% to 13%, effective December 17, 2024. This follows a decline in headline inflation to 4.9 percent year- on-year in November, in line with the central bank’s expectations. The decision was made at a meeting of the Monetary Policy Committee (MPC), which noted that food inflation and the diminishing effects of last year’s gas tariff hikes contributed significantly to the inflation slowdown. However, core inflation remained stubbornly high at 9.7 percent, while consumer and business inflation expectations continue to be volatile. “The recent policy rate cut is aimed at bolstering growth, while also ensuring inflation stays within manageable levels,” said the MPC statement. The MPC further noted positive economic signals, including an increase in high-frequency indicators of economic activity. “We expect GDP growth for FY25 to fall in the upper half of the projected 2.5%-3.5%,” the statement added, pointing to improved agricultural and industrial sector performance. The committee also highlighted key developments. since its last meeting, including a surplus current account for the third consecutive month, which has helped boost foreign exchange reserves to approximately $12 billion. Despite these positive signs, challenges remain, especially in the fiscal sector. Tax revenues have fallen short of targets, and substantial efforts will be needed to meet annual revenue goals. While the broad money growth has slowed, credit to the private sector has accelerated, contributing to the ongoing economic recovery,” the MPC said. to stay lower than its previous forecast of 11.5%-13.5% for FY25, although core inflation risks and global commodity price fluctuations may affect the outlook.