KARACHI: The State Bank of Pakistan (SBP) has announced a 200 basis points reduction in its key policy rate, lowering it to 13%.

This decision marks the fifth consecutive rate cut since June 2024, when the policy rate stood at 22%. The reduction, effective from December 17, 2024, is part of the SBP's ongoing efforts to manage inflation while supporting economic growth. The Monetary Policy Committee (MPC) of SBP made the announcement after its latest meeting, pointing out that inflation had decreased to 4.9% year-on-year (y/y) in November 2024, aligning with its expectations. This decline was primarily driven by a reduction in food inflation and the fading impact of the gas tariff hike from November 2023.

However, core inflation remains a challenge, standing at 9.7%, and inflation expectations from both consumers and businesses continue to fluctuate. The MPC acknowledged the possibility that inflation might remain volatile in the short term before stabilizing within the target range of 5-7%.The committee also observed that economic growth prospects had improved, as evidenced by recent increases in key economic indicators. The MPC emphasized that its gradual approach to reducing the policy rate had helped manage inflationary pressures while supporting sustainable economic growth. Although inflation remains a concern, the MPC remains optimistic about the medium-term outlook. Additionally, the MPC noted that the country's current account had been in surplus for the third consecutive month in October 2024. This achievement, despite weak financial inflows and large official debt repayments, has helped increase SBP's foreign exchange reserves to approximately $12 billion.

The committee also observed that global commodity prices remained favorable, contributing to the stabilization of domestic inflation and keeping the import bill in check. Credit to the private sector has shown a significant increase, reflecting the positive effects of improved financial conditions and banks' efforts to meet regulatory requirements. Despite these positive developments, there are still challenges. The shortfall in tax revenues continues to widen, placing additional pressure on fiscal policies. The MPC stated that the cumulative impact of the policy rate cuts since June 2024 was beginning to show results and would continue to unfold over the next few quarters. However, the committee reaffirmed that the real policy rate remains appropriately positive, which is crucial for stabilizing inflation within the target range of 5-7%.Market analysts had largely expected the SBP to continue its easing stance, given the slowdown in inflation.

A number of brokerage firms, including Topline Securities and Arif Habib Limited, had predicted a 200bps rate cut, in line with the MPC's decision. Economic expert Khurram Schehzad also suggested that the decreasing inflation would lead to further monetary easing. Schehzad highlighted that the rate cut would lower the cost of capital for businesses, encouraging investment and economic activity. Additionally, it would result in savings on debt servicing for the government, improving the fiscal balance in the coming months. This development is expected to support economic recovery while ensuring that inflation is brought under control in the longer run.