Fifth successive cut: SBP reduces key policy rate by 200bps, takes it to 13%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has reduced the key policy rate by 200 basis points to take it down to 13% on Monday. This is the fifth successive cut since June 2024 when the rate stood at 22%.

“At its meeting, the Monetary Policy Committee (MPC) decided to cut the policy rate by 200 bps to 13%, effective from December 17, 2024,” the MPC said in its statement.

“Headline inflation declined to 4.9% y/y in November 2024, in line with the MPC’s expectations. This deceleration was mainly driven by continued decline in food inflation as well as the phasing out of the impact of the hike in gas tariffs in November 2023.

“However, the Committee noted that core inflation, at 9.7%, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile. To this effect, the Committee reiterated its previous assessment that inflation may remain volatile in the near term before stabilizing in the target range.

“At the same time, growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity. Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check, while supporting economic growth on a sustainable basis.”

See how the key interest rate has moved since July 2022

The MPC noted that the current account remained in surplus for the third consecutive month in October 2024, which, amidst weak financial inflows and substantial official debt repayments, helped increase the SBP’s FX reserves to around $12 billion.

“Second, global commodity prices remained generally favourable, with positive spillovers on domestic inflation and the import bill. Third, credit to the private sector recorded a noticeable increase, broadly reflecting the impact of ease in financial conditions and banks’ efforts to meet the advances-to-deposit ratio (ADR) thresholds. Lastly, the shortfall in tax revenues from the target has widened.

“Based on these developments, the Committee assessed that the impact of the cumulative reduction in the policy rate from June 2024 is beginning to unfold and will continue to materialize over the next few quarters. In this context and taking into account today’s decision, the Committee noted that the real policy rate remains appropriately positive to stabilize inflation within the target range of 5–7 percent.”

In its previous meeting held on November 04, the MPC had cut the key policy rate by 250bps to bring it down to 15%.

Market expectations

A majority of market experts had expected the SBP to continue with its monetary easing stance as the slowing pace of inflation fuelled expectations of a fifth-consecutive reduction.

Brokerage house Topline Securities had anticipated a policy rate cut of 200 basis points (bps). Similarly, brokerage house Arif Habib Limited (AHL) anticipated a cut of 200bps.

Moreover, newly-appointed Advisor to Finance Minister on Economic and Financial Reforms Khurram Schehzad also said the slowing inflation rate “should result in more monetary easing” by the central bank.

This will lead “to further decline in cost of capital for businesses and industries, and higher savings on debt servicing for the government resulting in an improved fiscal balance in the coming months/quarters,” said Schehzad in a post on social media platform X.

Previous MPC meeting

In its November meeting, the MPC had cut the key interest rate by 250bps, exceeding market expectations.

Since then, several key developments on the economic front had taken place.

The rupee depreciated by 0.1%, while petrol prices increased 1.5%.

Internationally, oil prices lowered marginally since the last MPC and were hovering above $70 per barrel amid soft demand.

Pakistan’s headline inflation clocked in at 4.9% on a year-on-year basis in November 2024, lower than the reading in October 2024 when it stood at 7.2%.

In addition, the country’s current account posted a surplus of $349 million in October 2024 compared to a deficit of $287 million in the same month of the previous year. This was the third consecutive month of a current account surplus.

Foreign exchange reserves held by the State Bank of Pakistan (SBP) increased by $13 million on a weekly basis, clocking in at $12.05 billion as of December 6, data released on Thursday showed.

Total liquid foreign reserves held by the country stood at $16.60 billion. Net foreign reserves held by commercial banks stood at $4.55 billion.