KARACHI: Continuing the rate-cut trend that began on June 10 after a gap of almost four years, the State Bank of Pakistan (SBP) on Monday again slashed the lending rate by 100 basis points to 19.5 per cent to boost economic activities, projecting the real GDP to expand by 2.5-3.5pc in the current fiscal year.

Announcing the monetary policy at a press conference for the next two months, SBP Governor Jameel Ahmed said inflation would be between 11.5 and 13.5pc in FY25. At the same time, he said that the Monetary Policy Committee (MPC) assessed that despite today’s decision, the monetary policy stance remains adequately tight to guide inflation towards the medium-term target of 5-7pc.

“This assessment is also contingent on achieving the targeted fiscal consolidation, timely realisation of planned external inflows and addressing underlying economic weaknesses through structural reforms,” he said, observing that the June inflation was slightly better than anticipated.

“Considering these developments —along with a significantly positive real interest rate — the MPC viewed that there was room to further reduce the policy rate in a calibrated manner to support economic activity while keeping inflationary pressures in check,” said the SBP governor.

Projects real GDP to grow 2.5-3.5pc in FY25, sees inflation outlook risky

Since the last monetary policy, the MPC noted positive developments, such as the sharp narrowing of the current account deficit, the increase in SBP’s reserves to $9bn from $4.4bn in June 2023, the country’s reaching a staff-level agreement with the IMF for a $7bn loan, and ease in inflation and labour market conditions.

He said that headline inflation rose to 12.6pc year-on-year in June from 11.8pc in May, as expected. Core inflation, meanwhile, steadied around 14pc over the past two months.

The central bank noted risks to the inflation outlook from fiscal slippages and ad hoc decisions related to energy price adjustments.

“On balance, after considering these trends — and accounting for the sufficiently tight monetary policy stance and ongoing fiscal consolidation — average inflation is expected to remain in the range of 11.5-13.5pc in FY25, down significantly from 23.4pc in FY24,” said the Monetary Policy Statement (MPS).

At the same time, the continued robust growth in workers’ remittances, along with an increase in exports, is expected to contain the current account deficit in the range of 0-1.0pc of GDP in FY25, it added.

However, activity in the industry and services sectors is expected to recover, supported by relatively lower interest rates and higher budgeted development spending.

“Based on this, the MPC assessed FY25 real GDP growth in the range of 2.5 to 3.5pc as compared to 2.4pc recorded last year,” said Mr Jameel.

After recording surpluses for three consecutive months, the current account posted a deficit in May and June, which was in line with the MPC’s expectation, said the MPS. These deficits were largely due to higher dividend and profit payments and a seasonal increase in imports, which more than offset a significant increase in exports and workers’ remittances.

The SBP reported that the current account deficit in FY24 narrowed significantly to 0.2pc of GDP from 1pc over the preceding year.

However, the MPC expressed concern over the government’s increasing reliance on the domestic banking system for deficit financing, which has been squeezing borrowing space for the private sector. For FY25, the government has set the primary surplus target at 2pc of GDP.

Meanwhile, the growth in the banking system’s net domestic assets decelerated amidst subdued demand for private sector credit. “The committee viewed these developments as favourable for the inflation outlook,” the statement said.

Published in Dawn, July 30th, 2024