Positive economic indicators signal stabilisation ahead, says SBP Governor

Governor of the State Bank of Pakistan, Jameel Ahmed, stated on Monday that inflation was expected to remain low for the next three to four months due to factors such as the “end of base effect” and other upcoming developments. His comments followed the central bank’s decision to lower the key policy rate by 200 basis points to 13%, representing its fifth consecutive reduction as inflation continues to decline.

Speaking on the GEO News programme ‘Aaj Shahzeb Khanzada Kay Saath’, Ahmed highlighted the need for the central bank to closely monitor concerns related to core inflation. While acknowledging that risk factors remain despite the overall decline in inflation, he expressed optimism about the positive indicators for stabilizing the economy as the Consumer Price Index (CPI) dropped to 4.9% last month from 38% within the last 18 months.

He said any future increase in inflation should not be a cause for concern as it is expected to stabilse afterward. He projected that it would take another four to six quarters for the full impact of the policy rate cuts to be realized in terms of enhancing economic activity and consumer sentiment.

The governor also expressed confidence in managing foreign debt payments, assuring that Pakistan would have no difficulties in meeting its obligations with current foreign reserves. He noted that the government’s reduced interest rates would lead to savings amounting to Rs 1,500 billion.

Earlier yesterday, SBP announced the cut in its key policy rate by 200 basis points to 13%, following previous reductions of 150 basis points in June, 100 in July, 200 in September, and a record 250 basis points in November, cumulatively lowering the rate by 900 basis points since June.

The Consumer Price Index (CPI) for November matched the expectations of the Monetary Policy Committee (MPC), coming in at 4.9%, significantly lower than market consensus. The MPC attributed this decrease to a sustained decline in food inflation and the fading impact of gas tariff hikes from November 2023. However, core inflation remains stubbornly high at 9.7%, and both consumer and business inflation expectations continue to be volatile.

The committee also observed that the current account has remained in surplus for three consecutive months as of October 2024, which has contributed to increasing foreign exchange reserves to approximately $12 billion. Given these developments, the MPC believes that the real policy rate is suitably positive to maintain inflation within the target range of 5% to 7%.