SBP Cuts Policy Rate by 200 Bps to 17.5% as Inflation Eases

The State Bank of Pakistan (SBP) announced a significant reduction in its policy rate, cutting it by 200 basis points (bps) to 17.5%, effective from September 13, 2024. This decision by the Monetary Policy Committee (MPC) follows a sharp decline in both headline and core inflation over the past two months.

The MPC noted that inflation had decreased more than expected, largely due to delays in energy price hikes and favorable global oil and food prices. Despite this, the committee remains cautious, acknowledging that uncertainties persist. The MPC emphasized that the tight monetary stance had played a crucial role in bringing inflation down and highlighted the importance of maintaining a cautious approach.

In terms of external factors, the SBP reported that global oil prices had fallen, though volatility remains. Meanwhile, the SBP’s foreign exchange reserves stand at $9.5 billion, despite weak inflows and continued debt repayments.

On the real sector front, domestic sales indicators suggest moderate economic growth, supported by an increase in cement and petroleum sales. However, the outlook for the agricultural sector has weakened due to expected shortfalls in cotton production. The overall GDP growth for FY25 is projected to remain in the 2.5-3.5% range.

The external sector saw improvements, with elevated remittances and export earnings helping to contain the current account deficit. Workers’ remittances and softening crude oil prices are expected to keep the deficit within the range of 0-1% of GDP for FY25.