SBP delivers third rate cut in a row

• Slashes key policy rate by 200bps to 17.5pc
• Reduction most aggressive in over four years, in line with market expectations
• Central bank says pace of disinflation exceeded earlier projections
KARACHI: The State Bank slashed its key policy rate by 200 basis points to 17.5 per cent on Thursday, the third straight reduction since June, as the country looks to spur growth as inflation eases.
The cut — the most aggressive since April 2020 — was in line with the expectations of financial experts and bankers but fell short of demands from the trade and industrial sectors, which expected a bigger reduction after inflation fell to single digits in August for the first time in nearly three years.
Thursday’s move follows cuts of 150bps in June and 100bps in July that have taken the rate down from an all-time high of 22pc — set in June 2023 and left unchanged for a year.
Despite the 200bps reduction, the real interest rate remains significantly positive at 8pc, as inflation in August stood at 9.6pc. Trade and industry across the country have been pressing for a more substantial cut of 500bps to stimulate economic activity and drive higher growth.

The Monetary Policy Committee (MPC) highlighted risks to the near-term inflation outlook. “Core inflation is still high and consumers’ inflation expectations increased further in the latest survey,” the committee said.
Also, there is uncertainty stemming from the timing and magnitude of adjustments in administered energy prices, the future course of global commodity prices and any additional taxation measures to meet the shortfall in revenue collection, it added.
The committee projected that the average inflation for FY25 could fall below the earlier forecast range of 11.5pc to 13.5pc, contingent on achieving targeted fiscal consolidation and the timely realisation of planned external inflows.
Both headline and core inflation fell sharply over the past two months. “The pace of this disinflation has somewhat exceeded the Committee’s earlier expectations,” it said.
The MPC underscored the importance of the tight monetary policy stance in driving the sustained decline in inflation over the past year.
In light of recent developments and potential risks to the inflation outlook, the MPC assessed that the real interest rate remains sufficiently positive to bring inflation down to the medium-term target of 5pc to 7pc and ensure macroeconomic stability.
External sector
In July 2024, elevated workers’ remittances and a substantial improvement in export earnings helped contain the current account deficit to $200 million despite an increase in imports.
“The global macroeconomic environment also turned favourable as manifested by the substantial softening of crude oil prices and relative easing of global financial conditions. Going forward, import volumes are expected to increase, in line with the ongoing domestic economic recovery,” the committee said.
The SBP expects the terms of trade to improve further, driven by lower crude oil prices, which are likely to help contain the overall trade deficit in FY25. Export earnings are expected to remain stable, with growth in high-value-added textiles expected to offset the anticipated decline in rice exports.
The MPC observed that these factors, along with robust workers’ remittances, are expected to keep the current account deficit within the projected range of 0pc to 1pc of GDP in FY25.
Real estate and fiscal sectors
Recent high-frequency sales indicators reflect a moderate pickup in economic activity, the committee said. At the same time, it noted that the outlook for the agriculture sector has weakened. “The real GDP growth outlook remained in line with the MPC’s earlier assessment of 2.5pc to 3.5pc for FY25,” it said.
The MPC emphasised that the planned official foreign exchange inflows would be critical for the government to reduce its reliance on the domestic banking sector, improve the net foreign assets and create space for lending to the private sector.
Published in Dawn, September 13th, 2024