SBP cuts policy rate by 200bps as inflation continues to decline

• SBP cuts policy rate to 13% in today’s meeting.
• Consumer price index for Nov clocked in at 4.9%.
• It takes the total cuts to 900bps since June.

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and increased global commodity prices.

KARACHI: The State Bank of Pakistan (SBP) on Monday slashed the key policy rate by 200 basis points (bps) to 13%, marking its fifth consecutive cut as inflation continues to drop. 

Last month, the central bank cut its key interest rate by 250bps to 15%, at least 0.5% more than the market expectations amid declining inflation.  

The consumer price index (CPI) for November clocked in at 4.9% in line with the Monetary Policy Committee (MPC) expectations — well below the general market consensus.

“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,” noted the MPC, adding that the core inflation, at 9.7%, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile. 

Pakistan’s latest move makes this year’s cuts the most aggressive among emerging market central banks in the current easing cycle, barring outliers such as Argentina.

The committee, which met today, also noted that the current account remained in surplus for the third consecutive month in October 2024 which helped increased the forex 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,” it added. 

The statement said that considering aforementioned developments, the MPC views the real policy rate remains appropriately positive to stabilise inflation within the target range of 5 to 7%.

The bank noted that it expected inflation to average “substantially below” its earlier forecast range of 11.5% to 13.5% in 2025.

It added that the inflation outlook was susceptible to risks, including measures to meet government revenue shortfalls as well as food inflation and increased global commodity prices.

“Inflation may remain volatile in the near term before stabilising in the target range,” the bank said.

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

The bank noted that “considerable efforts and additional measures” would be required for Pakistan to meet its annual revenue target, a key focus of the IMF agreement.

All 12 analysts surveyed by Reuters expected a 200bps cut, after inflation fell sharply, slowing to 4.9% in November, largely due to a high base a year earlier, coming in below the government’s forecast and significantly lower than a multi-decade high of around 40% in May last year.

Monday’s move follows cuts of 150bps in June, 100 in July, 200 in September, and a record cut of 250bps 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 900bps since June.