The State Bank of Pakistan’s Monetary Policy Committee reduced the policy rate by 200 bps to 13% on Monday amid the falling pace of inflation rate and record trading at the stock market.

“However, the committee noted that core inflation, at 9.7 per cent, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile,” the central bank said in a statement.

A fifth straight reduction since June makes this year’s cuts the most aggressive among emerging market central banks in the current easing cycle, barring outliers such as Argentina.

The South Asian country is navigating a challenging economic recovery path and has been buttressed by a $7 billion facility from the International Monetary Fund (IMF) in September.

Monday’s move follows cuts of 150 bps in June, 100 in July, 200 in September, and a record cut of 250 bps in November, that have taken the rate down from an all-time high of 22%, set in June 2023 and left unchanged for a year.

It takes the total cuts to 900 bps since June.

The committee reiterated that inflation might remain “volatile” in the near term before stabilising in the target range.

It noted that the current account remained in surplus for the third consecutive month in October, which, amidst weak financial inflows and substantial official debt repayments, helped increase the SBP’s foreign exchange reserves to around $12 billion.

Moreover, global commodity prices remained “generally favourable,” with positive spillovers on domestic inflation and the import bill. Credit to the private sector also recorded a “noticeable” increase, broadly reflecting the impact of ease in financial conditions and banks’ efforts to meet the advances-to-deposit ratio thresholds. The shortfall in tax revenues from the target has also widened. 3.

“The committee noted that the real policy rate remains appropriately positive to stabilise inflation within the target range of 5 to 7 per cent.”

According to the central bank, the real GDP growth in FY25 is expected to remain in the upper half of the projected range of 2.5 to 3.5 per cent.

The MPC expected that uptrend in workers’ remittances and exports, along with favorable international commodity prices, would keep the current account deficit near the lower bound of the projected 0 to 1 per cent of GDP range in FY25. “This will enable the SBP’s FX reserves to exceed $13.0 billion by June 2025.”

While mentioning the fiscal sector, it warned that “considerable efforts and additional measures” would be required to meet the annual revenue target.

Headline inflation eased further to 4.9 per cent year-on-year in November from 7.2 per cent in the previous month. The committee assessed FY25 inflation to average substantially below its earlier forecast range of 11.5 to 13.5 per cent.

“At the same time, the inflation outlook is susceptible to multiple risks, including additional measures to meet the revenue shortfall, resurgence in food inflation and an increase in global commodity prices.”

Analysts expectations

Analysts had anticipated a potential reduction of 2% to 3% in the current policy rate.

The business community has been vocal in its demand for a more significant decrease, calling for a reduction of 4% to 5% to support economic growth. Notably, the committee has already lowered the policy rate by 7% over the course of four meetings.

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The Monetary Policy Committee (MPC) is fully empowered to determine the monetary policy stance as specified in Section 9E of the SBP Act of 1956. Its primary responsibilities include formulating the monetary policy, which involves making decisions on intermediate monetary objectives, key interest rates, and the supply of reserves in Pakistan, along with the authority to create regulations for their implementation.

It is also responsible for approving and issuing the monetary policy statement and other related measures, performing any other functions conferred by law, and carrying out ancillary activities necessary for the execution of its duties under the Act.

With input from Reuters