SBP cuts policy rate by 250bps,

The State Bank of Pakistan (SBP) announced on Monday a reduction of the key policy rate by 250 basis points, bringing it down to 15%.

The decision marks the fourth consecutive cut, surpassing market expectations by 0.5%.

The SBP’s Monetary Policy Committee (MPC) noted that inflation has declined more rapidly than anticipated, reaching approximately 7.2% in October, slightly above the government’s target of 6% to 7%.

The MPC attributed this disinflation primarily to a significant drop in food inflation, favorable global oil prices, and the lack of anticipated adjustments in gas tariffs and Petroleum Development Levy (PDL) rates in recent months.

For the current fiscal year, which began in July, the average consumer price index inflation is reported at 8.7%. The International Monetary Fund (IMF) forecasts an average inflation rate of 9.5% for the year ending in June 2025.

Despite the recent improvements, analysts suggest that further rate cuts may be necessary to bolster economic growth. The finance ministry expects inflation to further decrease to between 5.5% and 6.5% in November.

However, concerns persist regarding potential inflationary pressures in 2025, particularly due to expected increases in electricity and gas prices following a $7 billion IMF bailout, as well as new taxes on various sectors set to take effect in January 2025.

The MPC acknowledged these risks but expressed confidence that near-term inflation could stabilize within the target range of 5-7%.

Key developments influencing the macroeconomic outlook include the IMF’s Extended Fund Facility (EFF) approval, which has reduced uncertainty, and recent surveys indicating improved confidence and lower inflation expectations. While government yields and the Karachi Interbank Offered Rate (KIBOR) have fallen, tax collection has not met fiscal year targets.

The MPC emphasized that the current monetary policy stance is designed to achieve sustained price stability and support overall economic growth.

The SBP also indicated that the average inflation for the fiscal year ending June 2025 is expected to be significantly lower than the previously forecasted range of 11.5% to 13.5%.

Economic conditions have shown signs of stabilization following a near-default situation last summer, aided by the IMF’s recent support. The IMF has projected Pakistan’s GDP growth at 3.2% for the fiscal year ending June 2025, an increase from 2.4% in fiscal 2024.