SBP surprises with hold on key policy rate at 12pc

The State Bank of Pakistan (SBP) announced on Monday that it has decided to keep the policy rate unchanged at 12 per cent, assessing the current real interest rate to be adequately positive on the forward-looking basis to sustain the ongoing macroeconomic stability.

The central bank’s policy rate, after being slashed by 1,000bps from 22pc since June 2024 in six intervals, now stands at 12pc.

February inflation stood at a near-decade low of 1.5pc, largely due to a high base a year ago. A Reuters survey of 14 analysts suggests that the central bank may further reduce rates, with a median forecast for a cut of 50 bps. Of the 10 analysts expecting a rate cut, three estimated its size at 100 bps, one at 75 bps, and six at 50 bps. The rest saw no change.

According to a notification issued by the State Bank of Pakistan today, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 12pc, noting that inflation in February turned out to be lower than expected, mainly due to a drop in food and energy prices.

“Notwithstanding this decline, the committee assessed the risks posed by the inherent volatility in these prices to the current declining trend in inflation,” the notification said.

It said that core inflation was proving to be more persistent at an elevated level, thus, uptick in the food and energy prices might lead to an increase in inflation.

“Economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators,” it said, adding that MPC viewed that some pressures on the external account emerged due to rising imports amid weak financial inflows.

“The MPC assessed the current real interest rate to be adequately positive on [the] forward-looking basis to sustain the ongoing macroeconomic stability,” the notification said.

According to the notification, the committee noted that the current account turned into a deficit of $0.4 billion in January after remaining in surplus over the past few months.

It said that the current account deficit, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP’s foreign exchange reserves.

It said that large-scale manufacturing output declined during the first half of the fiscal year 2025, despite a substantial increase of 19.1pc in December 2024.

“The shortfall in tax revenues from target widened further in January and February,” the notification said.

“Both consumer and business sentiments improved during the latest waves,” it said, adding that uncertainty has increased significantly amid the ongoing tariff escalations, which might 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,” it said.

“Based on these developments, the committee noted that the impact of sizable earlier reduction in policy rate is now materialising,” it said.

The MPC reiterated the importance of maintaining a cautious monetary policy stance to stabilize inflation within the target range of five to seven per cent, adding that along with structural reforms, it was essential to achieve sustainable economic growth.

It said that high-frequency indicators such as sales of automobiles, import volumes, credit to private sector and purchasing managers’ index show that economic activity was gaining further traction.

“Latest pulse surveys show improved consumer and business confidence,” it said, noting that the momentum depicted by these indicators is yet to fully reflect in Large-Scale Manufacturing (LSM) data, which contracted by 1.9pc in the first half of fiscal year 2025.

“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,” it said, expecting economic growth to recover in the second half of FY25 on the back of easing financial conditions.

“The committee maintains its earlier real GDP growth projection […] expects economic activity to gain further momentum going forward,” it said.

On the external sectors, the notification said that the current account turned into a deficit in January, shrinking cumulative surplus to $0.7bn during July-January FY25.

“While import volumes have been rising consistently in line with the pickup in economic activity, the uptick in some global commodity prices further pushed up import payments in January,” it said; however, robust workers’ remittances, along with relatively moderate growth in exports, proved instrumental in financing the elevated imports.

“The MPC assessed that these developments are broadly in line with its expectation and reaffirmed the FY25 current account balance projection of a surplus and a deficit of 0.5pc of GDP,” it said, emphasising the importance of strengthening external buffers in the presence of heightened global economic uncertainty.

The notification said that fiscal accounts for H1-FY25 indicated 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,” it said, noting that the shortfall in FBR tax revenue against its target widened further in January and February.

The committee assessed that the fiscal cushion created through contained current expenditures and expected decline in interest payments may keep the overall fiscal balance close to the target for FY25, it said.

The MPC also emphasised the importance of the continued fiscal consolidation to support macroeconomic stability and reiterated the need for fiscal reforms targeted at widening the tax base, the notification said.

While speaking about inflation, the notification said broad money growth remained unchanged at around 11.4pc year-on-year since the last MPC meeting, noting compositional shift in the NDA, as the government’s borrowing from the banking system rebounded and private sector credit showed greater than seasonal net retirement.

The latter was anticipated, given the aggressive lending by banks during Q2-FY25 to avoid ADR-related taxation, it said.

“However, the MPC noticed that PSC growth, at 9.4pc, is still significant, reflecting the impact of the ease in financial conditions and ongoing economic recovery,” it said.

“On the liability side, the growth of the currency in circulation increased, while deposit growth further decelerated since the last MPC,” it added.

Awais Ashraf, director of research at AKD Securities, said that external inflows and a higher current account deficit in January prompted the SBP to take a cautious stance, resulting in a decline in foreign exchange reserves.

“However, inflows following the IMF review are expected to improve, strengthening the country’s position to secure more favorable terms on new commercial borrowing,” he said while speaking to Dawn.com.

Most analysts expected a rate cut and believe the central bank will stop when rates hit 10.5pc to 11pc due to a potential rise in inflation. They anticipate a moderate rise from March to May.

Inflation will “bottom out” in the year’s first quarter before gradually rising, said Ahmad Mobeen, senior economist of S&P Global, who anticipated average inflation of 6.1pc for 2025.

Despite the “sharp drop” in the Consumer Price Index (CPI), he said urban core inflation, indicative of price pressures, remained high, at 7.8pc.

At its last policy meeting, the central bank kept its forecast of full-year GDP growth at 2.5pc to 3.5pc and predicted faster growth would help boost foreign exchange reserves that had been lacklustre.

“While GDP posted 0.9pc growth in the first quarter of fiscal year 2025, large-scale manufacturing remains in negative territory, and production has yet to gain momentum,” said Sana Tawfik, head of research at Arif Habib Limited.

“The transmission of lower rates to economic activity is yet to be seen.”

The target was only possible if industrial activity picked up and agricultural output improved, she added.