Karachi December 16 2024: At its meeting today, the Monetary Policy Committee (MPC) decided to cut the policy rate by 200 basis points to 13 percent, effective from December 17, 2024.
Headline inflation declined to 4.9 percent y/y in November 2024, in line with the MPC’s expectations. This deceleration was mainly driven by continued decline in food inflation as well as the phasing out of the impact of the hike in gas tariffs in November 2023.
However, the Committee noted that core inflation, at 9.7 percent, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile. To this effect, the Committee reiterated its previous assessment that inflation may remain volatile in the near term before stabilizing in the target range. At the same time, the growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity.
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.
The Committee noted the following key developments since its last meeting that may have implications for the macroeconomic outlook. First, the current account remained in surplus for the third consecutive month in October 2024, which, amidst weak financial inflows and substantial official debt repayments, helped increase the SBP’s FX reserves to around $12 billion. Second, global commodity prices remained generally favourable, with positive spillovers on domestic inflation and the import bill. Third, credit to the private sector recorded a noticeable increase, broadly reflecting the impact of ease in financial conditions and banks’ efforts to meet the advances-to-deposit ratio (ADR) thresholds. Lastly, the shortfall in tax revenues from the target has widened.
Based on these developments, the Committee assessed that the impact of the cumulative reduction in the policy rate from June 2024 is beginning to unfold and will continue to materialize over the next few quarters. In this context and taking into account today’s decision, the Committee noted that the real policy rate remains appropriately positive to stabilize inflation within the target range of 5 – 7 percent.
