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:
- 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:
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%.
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.
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.
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.
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
