SBP cuts interest rate to lowest in over two years

KARACHI: The State Bank of Pakistan lowered its benchmark interest rate by 200 basis points to 13 percent on Monday, it said in a statement, the fifth rate cute this year as the policymakers attempt to revive sluggish economy amid declining inflation.

The most recent cut took interest rates to their lowest level since April 2022. After reaching an all-time high of 22 percent in May and June 2024, Pakistan experienced an unprecedented monetary easing, with a total rate reduction of 900 bps this year. This shift was largely due to easing inflation pressures.

Additionally, in light of the prolonged economic slowdown in recent years, it was essential to stimulate domestic economic activity to boost employment and increase tax revenues. The debate is now turning to whether the central bank would slow the pace of further rate cuts or pause next year, given that core inflation is expected to remain volatile.

The SBP said that headline inflation fell to 4.9 percent year-on-year in November, driven by a continued decrease in food inflation and the diminishing impact of increased gas tariffs. However, it also pointed out that core inflation, which stands at 9.7 percent, remains stubbornly high, and the inflation expectations of consumers and businesses continue to be volatile.

“Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting economic growth on a sustainable basis,” it said in a statement.

“The Committee reiterated its previous assessment that inflation may remain volatile in the near term before stabilizing in the target range,” it added. “At the same time, the growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity,” it noted.

The SBP expects that inflation would average significantly below its earlier forecast range of 11.5 percent to 13.5 percent. The precise inflation range is expected to be projected in the upcoming policy meeting scheduled for January.

According to the central bank, the inflation outlook remains vulnerable to several risks, including additional measures to address the revenue shortfall, resurgence in food inflation, and rising global commodity prices.

The SBP projects that the GDP growth rate would likely remain in the upper half of the estimated range of 2.5 percent to 3.5 percent, as the downside risks to the overall crop outlook have somewhat diminished.

However, the SBP believes that achieving the targeted primary surplus would be challenging. Considerable efforts and additional measures would be necessary to meet the annual revenue targets. This underscores the importance of implementing fiscal reforms to broaden the tax base and achieve the desired fiscal consolidation.

The SBP expects a larger current account surplus for November, its governor told analysts During an analysts’ briefing following the monetary policy meeting, Jameel Ahmad said that Pakistan is expected to post a healthy current account surplus in November, significantly exceeding the existing surplus of $218 million recorded in the first four months of the fiscal year 2025.

The SBP forecasts the current account deficit to fall within the lower bound of the projected 0-1 percent of GDP for FY25.

Regarding external repayments, the governor informed analysts that out of a total payable amount of $26.1 billion, $10.4 billion has already been paid or rolled over. The remaining debt repayment for the fiscal year, excluding planned rollovers, stands at $5 billion.

Ahmad emphasised that the inflows expected in the third quarter of FY25 from official channels would roughly equal the outflows of $2 billion. Consequently, any intervention by the central bank in the interbank market would aid in building forex reserves.

He anticipates that foreign exchange reserves would exceed the level of $13 billion by the end of June 2025. According to him, the momentum in remittances is increasing, and this trend for the first two weeks of December is higher than in previous months.

In response to a question, the governor noted that the sharp decline in the policy rate is expected to benefit the government’s expenditure. Despite a shortfall in revenue, he believes the fiscal balance would remain within the budgeted range. He stated that with a higher-than-expected drop in interest rates, the buybacks of securities, and a decline in external debt, the interest expense will be significantly lower. In his last briefing, the governor mentioned that the interest expense would be less than Rs8.5 trillion, resulting in savings of Rs1.3 trillion, or 1 percent of GDP for the government.

Meanwhile, PM Office Media Wing said in a press release that Prime Minister Shehbaz Sharif welcomed the reduction in the SBP policy rate by further 2 percent, and said that its current 13 percent rate bode well for the country’s economy.

He further expressed the confidence that the decrease in the policy rate would further enhance investors’ confidence in the national economy and would spur investment. He said that lowering of inflation rate also brought down the policy rate, adding that in the future, the inflation rate would further come down.

He also appreciated the federal finance minister and other authorities for making efforts in this regard. Meanwhile, the stock market achieved another milestone on Monday, surpassing the 116,000-point mark for the first time due to policy rate cut.

Improving macroeconomic indicators such as robust remittance inflows, stable foreign reserves, and declining inflation have reinforced confidence in the country’s economic recovery.

The Pakistan Stock Exchange’s (PSX) benchmark KSE-100 Shares Index gained 1,867.61 points, or 1.63%, to close at 116,169.41, after hitting an intraday high of 116,681.59 points, Geo News reported.

“Stocks are bullish, led by scrips across the board, as investors eye a significant SBP rate cut amid thin inflation,” said Ahsan Mehanti, Managing Director and CEO of Arif Habib Commodities.

“The recent cut in government bond yields to 11.99%, upbeat economic indicators for trade balances, foreign exchange reserves, and remittances have played a catalyst role in this record surge at PSX,” he added.

The market remained buoyed by anticipation of the Monetary Policy Committee (MPC) announcement. November’s inflation rate fell to 4.9%, creating a positive real interest rate of 10% and substantial room for monetary easing. Investors are further encouraged by the government’s revision of National Savings Schemes (NSS) profit rates, which saw a 250 basis point cut in Savings Account returns. This move is expected to redirect funds from savings instruments into equities, bolstering market activity.

Foreign inflows also remain strong. Remittances rose by 29 percent year-on-year to $2.9 billion in November, contributing to stable foreign reserves of $16.6 billion as of December 6, 2024. Reserves held by the SBP increased to $12.051 billion, the highest since March 2022.

Meanwhile, the Current Account Deficit (CAD) narrowed significantly by 79 percent year-on-year to $217 million during the first two months of FY2025, supported by strong remittance inflows and stable export earnings.

Exports are projected to reach $33 billion by the end of FY2025, while remittances are forecasted to climb to $33.5 billion, driven by government incentives and easing global inflation. Economic recovery is also evident in automobile sales, which surged 52 percent year-on-year in November, reflecting robust consumer demand.

The banking sector continues to show improvement, with the advance-to-deposit ratio (ADR) rising to 47.8 percent in November, up from 44.3 percent in October, as banks strive to meet the mandatory 50 percent threshold.

Last week’s Treasury Bill (T-bill) auction raised Rs1.256 trillion against a target of Rs1.2 trillion, further boosting liquidity. Yield reductions included the biggest cut of 100 basis points (bps) for three-month papers, lowering the rate to 11.99 percent from 12.99 percent. Six-month papers saw an 89bps reduction to 11.99 percent, while the yield on 12-month papers was trimmed by 5bps to 12.3 percent. These adjustments have strengthened expectations of monetary easing.

Economic activity is gathering pace, underpinned by strong investor sentiment and consumer demand. Passenger car sales increased 50 percent in the first five months of FY2025, while the Asian Development Bank (ADB) approved $530 million in loans to modernise Pakistan’s power distribution network and expand social protection programmes.

The PSX’s performance last week, which saw the KSE-100 Index break the 114,000-point barrier for the first time, reflects easing political uncertainties and robust economic fundamentals. These factors continue to support the market’s upward trajectory.

Meanwhile, central bank governor Jameel Ahmed said on Monday that the inflation is expected to go up after remaining low for the next three to four months.Ahmed, speaking on Geo News programme “Aaj Shahzeb Khanzada Kay Saath”, said that the “end of base effect and some other things in pipeline” were the reasons for an expected hike in inflation.He detailed that the central bank will have to closely monitor a factor of concern to bring down the core inflation.