SBP slashes interest rate by 200bps

Bigger-than-expected cut lowers rate to 17.5%

KARACHI:

In an aggressive move, the central bank cut its key policy rate (interest) by a bigger than expected 200 basis points to 17.5% on Thursday – the third straight reduction since June.

The move is expected to help ramp up economic activities, with the government seeking to stimulate growth amid easing inflation.

The faster pace of "disinflation" during the past two months due to a delay in the implementation of planned increases in energy prices and falling global oil and food prices provided a big room to the State Bank of Pakistan (SBP) to make largest cut of 200 basis points on Thursday.

People were expecting the bank to cut rates by 150 basis points after inflation fell to single digits in August for the first time in nearly three years.

Thursday's move follows cuts of 150 basis points in June and 100 basis points in July that have taken the rate down from an all-time high of 22% - set in June 2023 and left unchanged for a year.

Despite the third consecutive monetary easing in the past three months, yet the central bank said it is maintaining a "tight monetary policy". It is still running a larger real interest rate at 7.5-8% through keeping a large gap between the current key policy rate and the latest CPI inflation rate.

The annual consumer price inflation rate slowed to 9.6% in August from a multi-decade high of nearly 40% in May 2023.

This helps the bank to offset any unforeseen inflationary pressure, as it projected the growth to ascent to the upper limit of its projection in the range of 2.5% to 3.5% during the current fiscal year.

In Thursday's meeting, the bank's Monetary Policy Committee (MPC) announced the rate cut would come into effect from Friday (September 13).

The committee viewed the possibility of FY25 average inflation falling below the earlier forecast range of 11.5–13.5%.

After attending analysts briefing given by SBP Governor Jameel Ahmad on the latest monetary policy statement (MPS), Taurus Securities Head of Research Mustafa Mustansir reported, "The SBP governor informed that the government has arranged over $2 billion in external financing in order to meet the funding shortfall to comply with the IMF conditions and that he was confident of the Extended Fund Facility (EFF) approval by the IMF Executive Board during the month of September 2024."

"Also, given that the EFF approval would unlock other financing inflows and the comfortable balance of payments position, no further shortfall was anticipated going forward."

The central bank chief was further quoted as saying the SBP has bought $573 million in June 2024, projecting the SBP foreign exchange reserves would surge to $12 billion by March 2025, according to Mustansir.

Moreover, the governor also shared that Pakistan's expected maturing external debt between September 2024 and March 2025 amounted to $14.1 billion. Out of this, $8.3 billion is expected to be rolled-over. "Consequently, the net external debt repayment is expected to be $5.8 billion (evenly distributed $800 million to $1 billion/month).

Also, from July 2024 to date, $4 billion in external debt obligations had been settled through rollover of $2.3 billion and repayment of $1.7 billion in external debt.

Meanwhile, the SBP has made a third straight cut in the interest rate over the past three-month, slashing it cumulatively by 450 basis points to date. Earlier, the bank maintained a record high policy rate at 22% in the prior one year (June 2023 to June 2024).

The monetary policy statement further reads that going forward "import volumes" are expected to increase, in line with the ongoing domestic economic recovery. However, the improvement in the country's terms of trade, mainly driven by softening crude oil prices, is expected to contain the overall trade deficit in FY25. Also, export earnings are expected to remain stable as the growth in high value added textiles is expected to compensate for the likely reduction 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 0-1% of GDP in FY25. This contained current account deficit, along with the realization of inflows planned under the IMF programme, will help further strengthen SBP's foreign exchange reserves.

During July-August FY25, the FBR tax collection grew by 20.5%. "The MPC noted that the pace of tax collection in the remaining months of FY25 needs to be significantly higher than the current rate to meet the revenue target for the fiscal year."

Meanwhile, the fiscal consolidation achieved in the past couple of years has supported the monetary policy in bringing inflation down and restoring overall macroeconomic stability, the report said.

The MPC assessed the real interest rate to still be adequately positive to bring inflation down to the medium-term target of 5-7% and help ensure macroeconomic stability. "This would be essential to achieve sustainable economic growth over the medium term."

On the other hand, the committee observed that the continued ease in inflationary pressures and the unfolding impact of recent policy rate cuts will support the growth prospects in the "industry and services sectors".

At the same time, the MPC noted that the outlook for the agriculture sector has weakened. "This is attributed to an expected shortfall in cotton production from the government's target, given the decline in area under cultivation and a substantial drop in cotton arrivals by end-August 2024."

The SBP's profit for the financial year ended June 30, 2024 had clocked-in well above the earlier shared estimate of Rs2.5 trillion, and the same would be transferred to the government in due course.