SBP cuts policy rate by 250bps, exceeding forecasts, in fourth straight easing

• MPC says inflation fell faster than hoped, nearing target range.
• Says tight monetary policy stance continues to contain inflation.
• Asserts policy decision will also support macroeconomic stability.

The State Bank of Pakistan (SBP) on Monday slashed the key policy rate by 250 basis points (bps) to 15%, at least 0.5% more than the market expectations, marking its fourth consecutive cut as inflation remains in single digits through October.

Analysts as well independent economists widely believed the central bank would cut its key interest rate further at its policy meeting, with policymakers continuing their efforts to revive a fragile economy as inflation eases off recent record highs.

"The inflation has declined faster than expected and has reached close to its medium-term target range in October," the SBP's Monetary Policy Committee (MPC) noted, adding that "the tight monetary stance continues to play an important role in sustaining the downward trend in inflation."

The MPC, which met on Monday to decide the rate, attributed the disinflation to a sharp decline in food inflation, favourable global oil prices and the absence of expected adjustments in gas tariffs and Petroleum Development Levy (PDL) rates in recent months.

Central Bank Governor Jameel Ahmad told analysts in a briefing following the rate cut decision that bilateral partner countries have assured the International Monetary Fund (IMF) that they will continue rollovers of their debt for the duration of Islamabad's bailout programme.

Average consumer price index inflation in the South Asian country is 8.7% in the current financial year, which started in July, the statistics bureau says. The IMF expects inflation to average 9.5% for the year ending June.

While the economy has started to gradually recover, and inflation has moved sharply down from a multi-decade high of nearly 40% in May 2023, analysts say further rate cuts are needed to bolster growth.

October inflation came in at 7.2%, slightly above the government's expectation of 6% to 7%. The finance ministry expects inflation to slow further to 5.5% to 6.5% in November.

However, inflation could pick up again in 2025, driven by electricity and gas price increases after a new $7-billion IMF bailout, and the potential impact of taxes on the retail, wholesale and the farm sector announced in the June budget to take effect in January 2025, some analysts say.

However, taking into account the inherent risks associated with these factors, the MPC assessed that the near-term inflation might remain volatile before stabilising within the target range. 

The committee noted key developments impacting the macroeconomic outlook: the IMF’s EFF approval reduced uncertainty; October surveys showed improved confidence and lower inflation expectations; government yields and KIBOR fell; tax collection missed its FY25 target; and global oil, metal, and agricultural prices rose amid geopolitical tensions.

The statement said that considering aforementioned developments, the MPC views the current monetary policy stance as appropriate to achieve the objective of price stability on a durable basis by maintaining inflation within the 5-7% target range. 

"This will also support macroeconomic stability and help achieve economic growth on a sustainable basis," it added.

Despite not providing revised figures, the bank anticipates that average inflation for the fiscal year ending in June 2025 will be significantly lower than the previous 11.5 to 13.5% forecast, and GDP growth for the current fiscal year will exceed previous expectations, though still be within the 2.5 – 3.5% targeted range.

Adnan Sheikh, assistant vice president at Pak Kuwait Investment Company, said the larger than expected cut indicated a rapid easing of inflation.

He noted the reduction is crucial for sectors like manufacturing, consumer, construction, and textiles, which are operating below optimum capacity, especially as purchasing power for ordinary citizens has plunged after a long period of rapid inflation.

Pakistan's average inflation rate stands at 8.7% in the current fiscal year, according to the statistics bureau, with the IMF predicting an average 9.5% inflation rate for the year ending June.

The central bank has slashed the benchmark policy rate to 17.5% from an all-time-high of 22% in three consecutive policy meetings since June, having last reduced it by 200 basis points in September.

Most respondents in a Reuters poll last week expected a cut of 200 bps after inflation moved down sharply from a multi-decade high of nearly 40% in May 2023, saying reductions were needed to bolster growth.

Economic activity has stabilised since last summer when the country came close to a default before an eleventh-hour bailout by the IMF.

The IMF, which in September gave a boost to Pakistan's struggling economy by approving a long-awaited $7 billion facility, said that the South Asian nation had taken key steps to restore economic stability with consistent policy implementation under the 2023-24 standby arrangement.

The IMF in its latest October report forecast Pakistan's gross domestic product growth at 3.2% for the fiscal year ending June 2025, up from 2.4% in fiscal 2024.