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• Sees rising imports, weak financial inflows threatening economic gains
• Says despite inflation drop, core prices persistently remain at elevated levels
KARACHI: The State Bank of Pakistan (SBP) on Monday decided to keep the key interest rate unchanged at 12 per cent, defying market expectations of a rate cut. The decision was influenced by weak financial inflows, rising imports and concerns over a widening current account deficit.
The central bank had slashed rates by 1,000 bps from an all-time high of 22pc in June 2024 to try and revive economic growth while navigating reforms under a $7 billion facility from the International Monetary Fund agreed in September.
However, despite a positive real interest rate of 10.5pc, the central bank chose to maintain its cautious stance, leaving businesses and investors disappointed.
The main inflation rate in February stood at 1.5pc, which many believed created ample room for the policy rate to be reduced to single digits, as demanded by trade and industry leaders.
The Monetary Policy Committee (MPC), in its policy statement, cited concerns that core inflation remains persistent at an elevated level. Rising food and energy prices could also lead to renewed inflationary pressures in the coming months.
The decision surprised many analysts, as surveys and market trends had widely anticipated a rate cut.
According to Reuters, 10 of the 14 analysts it surveyed had expected the central bank to cut its key rate, while four expected it to hold the rate. The analysts expected inflation to rise in May as the base-year effect wears off.
“SBP’s decision to pause the easing cycle reflects its cautious stance amid persistent core inflation and renewed pressures from rising food and energy prices,” said Sana Tawfik, head of research at Arif Habib Ltd.
“While economic activity is gaining momentum, external account vulnerabilities, driven by increasing imports and weak financial inflows, warrant a prudent approach,” she added.
The MPC stated that economic activity “continues to gain traction, as reflected in the latest high-frequency economic indicators”.
The committee maintains its earlier real GDP growth projection of 2.5-3.5pc for the current fiscal year (FY25) and expects economic activity to gain further momentum going forward. It noted that the impact of the sizable earlier reduction in policy rate is now materialising.
However, the MPC viewed that some pressures on the external account have emerged due to rising imports, weak financial inflows and increased debt repayments.
The current account turned into a deficit of $400 million in January 2025, significantly impacting foreign exchange reserves.
The SBP noted that despite a 19.1pc month-on-month growth in Large-Scale Manufacturing (LSM) in December 2024, overall LSM performance remained weak in the first half of FY25.
The central bank also pointed out shortfalls in tax revenues during January and February, despite improving consumer and business sentiment.
“On the global front, uncertainty has increased significantly amidst the ongoing tariff escalations, which may have implications for global economic growth, trade and commodity prices. In response to these developments, central banks in advanced and emerging economies have recently slowed the pace of their monetary easing,” the SBP said.
The MPC reiterated the importance of maintaining a cautious monetary policy stance to stabilise inflation within the target range of 5-7pc. This, along with structural reforms, is essential to achieve sustainable economic growth, it added.
Real sector
High-frequency indicators — including sales of automobiles, petroleum products and cement, as well as import volumes, credit to the private sector, and purchasing managers’ index — show that economic activity is gaining further traction, the SBP said.
“The drag in LSM growth is mainly coming from a few low-weight sub-sectors, which have more than offset the positive momentum in key sub-sectors like textiles, pharmaceuticals, automobiles and POL,” it added.
“At the same time, in the agriculture sector, the latest information, including satellite imagery, indicates subsiding of downside risks to Rabi crops after the recent rainfalls. The MPC expects economic growth to recover in H2-FY25 (the second half of the ongoing fiscal year) on the back of easing financial conditions,” it said.
Led by a broad-based acceleration in imports, the current account turned into a deficit in January 2025, shrinking the cumulative surplus to $700m during July-January FY25. The MPC assessed that these developments are broadly in line with its expectations and reaffirmed the FY25 current account balance projection of a surplus and a deficit of 0.5pc of GDP.
At the same time, the MPC noted that the majority of debt repayments for the year have already been made. With lower debt repayments and the expected realisation of planned official inflows in the remaining months of FY25, the SBP’s foreign exchange reserves are likely to reach above $13bn by June 2025.
Fiscal sector
The fiscal accounts for the first half of FY25 indicate an improvement in both the overall and primary balance relative to last year. “This was on the back of a sizable rise in revenues, particularly non-tax revenues, as well as contained expenditures, mainly subsidies,” the SBP said. However, it said that meeting the target for primary balance would be challenging.
Money and credit
The MPC said that private sector credit growth, at 9.4pc, is still significant, reflecting the impact of the ease in financial conditions and ongoing economic recovery.
Inflation
The steep fall in prices of perishable food items reinforced the impact of sufficient stocks of major non-perishable items on overall food prices. Similarly, energy prices continued to benefit from the moderation in global oil prices, stable exchange rate and favourable base effect.
“However, core inflation is still at an elevated level and is proving stickier than anticipated,” it said.
The committee assessed inflation to come down further before gradually inching up and stabilising within the target range of 5-7pc
Published in Dawn, March 11th, 2025
