SBP Governor Discusses Inflation Trends, Economic Outlook, and Policy Adjustments

The State Bank of Pakistan (SBP) Governor shared insights on the recent decision by the Monetary Policy Committee (MPC), noting that the rate reduction was driven by the current inflation outlook and positive economic indicators.

“The inflation data we’re seeing now is promising, and we expect further decreases in January,” the governor remarked. However, he did express concern that core inflation remains elevated.

He pointed out favorable developments in remittances and foreign exchange reserves, stating, "We remain optimistic about reaching $13 billion in reserves by June."

Ahmed also highlighted positive trends in exports and remittances, which have contributed to keeping the current account in a surplus. “Remittances are performing well, and exports are showing strength, both crucial for maintaining the current account surplus,” he added.

The SBP’s Monetary Policy Statement confirmed that inflation had dropped to 4.1% year-on-year in December, down from 4.9% in November. The statement credited the decline to lower domestic demand, stable supply conditions, and a favorable base effect.

However, it also cautioned that core inflation remains a concern, with expectations for slight increases in the coming months.

The MPC reviewed developments since its last meeting. Real GDP growth for Q1-FY25 was lower than expected at 0.9%, compared to 2.3% in the same quarter of FY24, primarily due to slower growth in the agricultural sector.

The current account recorded a $0.6 billion surplus in December, bringing the H1-FY25 surplus to $1.2 billion, driven by strong remittances and export growth. Despite this, tax revenues, though higher in December, remained below target for H1-FY25, and global oil price fluctuations added to economic uncertainty.

The governor also addressed recent changes in treasury bill rates, which were cut by as much as 41 basis points in the latest auction, signaling market expectations for a policy rate reduction. The 100 basis points cut by the MPC had been widely anticipated by analysts.

The statement also noted that the slowdown in large-scale manufacturing (LSM) had eased, with sectors like textiles and automobiles showing improvement. However, provisional GDP data for Q1-FY25 showed a decline in agricultural growth, which dropped to 1.2% compared to 8.1% during the same period last year.

On external trade, the SBP highlighted strong export performance, particularly in high-value textiles, and a broad increase in imports. While imports outpaced exports, remittances helped mitigate the trade deficit.

The current account balance is now expected to be close to breakeven for FY25, with a small surplus or a deficit not exceeding 0.5% of GDP.

On fiscal matters, the SBP pointed out a 26% year-on-year increase in FBR revenues for H1-FY25, although the gap from the target had widened. It also noted that controlled government spending and lower interest payments are expected to keep the fiscal deficit in line with targets.

The central bank reported a slowdown in money supply growth due to lower net domestic asset growth and a shift toward non-bank borrowing. Nevertheless, private sector credit surged, reflecting continued economic recovery and efforts by banks to meet required advances-to-deposit ratio (ADR) thresholds.

In conclusion, the SBP projected inflation to average between 5.5% and 7.5% for FY25. The MPC emphasized that the monetary policy stance will remain vigilant to ensure price stability and sustainable economic growth. The governor reiterated that the central bank will continue closely monitoring economic trends and adjust its policies accordingly