KARACHI: The State Bank has slashed the policy rate by 2.5 per cent, as slowing inflation provides room for the rate to be brought down from record levels a few months ago.

The Monetary Policy Co­mmittee (MPC) annou­nced its decision to cut the policy rate by 250 basis points to 15 per cent.

The decision surprised the experts who were exp­e­c­ting a 1.5 to 2pc or 150 to 200 basis points reduction, in line with the central bank’s “cautious approach”.

In its statement, the MPC noted that inflation has declined “faster than expected” in October.

“[A] sharp decline in food inflation, favourable global oil prices and abs­ence of expected adjustm­ents in gas tariffs and PDL rates have accelerated the pace of disinflation in recent months.”

“[T]he MPC now exp­ects the average inflation for FY25 to be significa­ntly lower than its previous forecast range of 11.5 [to] 13.5 percent,” the statement added.

The interest rate has been slashed by more than 700bps from its record high of 22pc in June 2024.

“Interest rate cut is positive for high leverage, cyclical and consumer discretionary companies. The leverage companies will benefit from lower finance cost, cyclicals will benefit from recovery of economy and consumer discretionary companies like autos will benefit from expected rise in consumer financing,” Topline Securities said in a statement.

In October, inflation was 7.2pc, bringing the gap between the policy rate and real interest rate — interest rate minus the rate of inflation — to over 10pc.

The gap has kept the market hopeful of more cuts in future. However, despite a steep fall in the interest rate, the private sector’s borrowing from banks is still negligibly small.

Reserves

The committee noted multiple risks like an escalation in the Middle East conflict, recurrence of food inflation pressures, ad hoc adjustments in prices and more taxes to plug revenue shortfall could offset the inflation assessment.

Some other key developments noted by the committee were the approval of the IMF loan programme, secondary market yields on government securities and Kibor, which have “declined substantially” and tax collection falling short of target during the first four months of FY25.

The MPC noted that the output of rice and sugarcane crops remained higher than estimates. The bumper crops have “more than offset” the estimated shortfall in maise and cotton output.

“Moreover, the pace of industrial activity is gaining further traction. In particular, textile, food, automobile and allied industries have recorded significant growth during July-August 2024,” it added.

The MPC has also improved its estimation of real GDP growth in FY25 to 2.5 to 3.5 per cent.

Higher remittances and exports are expected to keep the current account deficit within the range of zero 0 to 1oc of GDP.

“This, together with the realisation of planned official inflows, is expected to increase the SBP’s FX reserves to around $13 billion by June 2025,” it added.

During the first quarter of FY25, the fiscal and primary balances posted surpluses of 1.4pc and 2.4pc of GDP, respectively. “This improvement is mainly explained by record high SBP profit, which substantially increased the non-tax revenues.”

Published in Dawn, November 5th, 2024