A further reduction of 100bps. Policy Rate now 12%

on

The Monetary Policy Committee (MPC) reduced the policy rate by 100 basis points to 12%, citing declining inflation (4.1% year-on-year in December 2024) and improving economic activity, though core inflation remains elevated. Real GDP growth for the first quarter of the financial year 2025 (Q1-FY25) slowed to 0.9% due to weaker agricultural performance but is projected to recover to 2.5–3.5% for FY25.

Policy rates have seen a drop of 10% since June last year. The policy rate remained remained perched  at 22% for around one year until it started dropping in June 2024.

The current account surplus reached $1.2 billion in the first half of FY25 (H1-FY25), supported by strong remittances and export growth, with foreign exchange reserves expected to exceed $13 billion by June 2025. While fiscal revenues grew by 26% during H1-FY25, they remain below target, necessitating accelerated tax collection.

Inflation is projected to average 5.5–7.5% for FY25, with near-term risks from global commodity prices and domestic policy adjustments. The MPC emphasized maintaining a cautious monetary stance to ensure price stability and sustainable growth. 

Summary of Monetary Policy Statement – January 27, 2025

Key Decisions:

  1. Policy Rate Cut: The Monetary Policy Committee (MPC) reduced the policy rate by 100 basis points (bps) to 12%, effective January 28, 2025.
    • This decision reflects declining inflation (4.1% y/y in December) and moderate domestic demand, though core inflation remains elevated.
    • Economic activity is gradually improving, and the 1,000 bps rate cut since June 2024 is expected to further boost growth.

Key Economic Developments:

  1. Growth:

    • Real GDP growth for Q1-FY25 was 0.9%, lower than the previous year’s 2.3%, due to a significant slowdown in agriculture growth (1.2% vs. 8.1% in Q1-FY24).
    • Industrial growth shows recovery, driven by improvements in textiles, food and beverages, and automobiles, despite some drag from low-weight sectors like furniture.
    • Projected FY25 GDP growth remains within the range of 2.5–3.5%.

  2. External Sector:

    • The current account surplus reached $0.6 billion in December 2024 and $1.2 billion for H1-FY25, supported by strong remittances and export growth in high-value-added textiles.
    • Despite higher import volumes, remittance inflows helped offset the trade deficit.
    • SBP’s FX reserves are projected to exceed $13 billion by June 2025.

  3. Fiscal Sector:

    • FBR tax revenues grew by 26% in H1-FY25 but remain below target, necessitating faster growth to meet annual goals.
    • Contained expenditures and lower-than-budgeted interest payments may help meet fiscal deficit targets, though achieving the primary balance target remains challenging.

  4. Monetary Indicators:

    • Broad money (M2) growth slowed to 11.3% y/y due to deceleration in net domestic assets (NDA) growth.
    • Private sector credit expanded sharply, driven by economic recovery and improved financial conditions, while bank deposits declined.

  5. Inflation:

    • Headline inflation eased to 4.1% y/y in December, driven by lower electricity tariffs, stable exchange rates, and adequate food supply.
    • Inflation is expected to rise close to the 5–7% target range by the end of FY25, with average inflation projected at 5.5–7.5%.
    • Risks include global commodity price volatility, energy tariff adjustments, and food price fluctuations.

https://www.sbp.org.pk/m_policy/2025/MPS-Jan-2025-Eng.pdf