KARACHI: The State Bank of Pakistan (SBP) has further reduced the interest rate by100 basis points to 12 per cent, making the total decrease in the policy rate 1000 basis points since June 2024.

State Bank Governor Jameel Ahmed announced the first monetary policy of the new calendar year at a press conference on Monday. The governor said the economic indicators were reviewed for the next six months, adding that the main inflation (CPI) would remain stable in the range of 5.5 to 7.5pc till June 2025.

However, he expressed concern over 9.1pc core inflation in Dec FY25. `The inflation came down to 4.1pc in Dec 2024 from 38pc in May 2023 while it may come further down in January, said Mr Jameel.

He said the current account was in surplus with $1.2 billion in the first half of the current fiscal year while by the end of June 2025, it could be a deficit of 0.5pc or a surplus of 0.5pc of GDP.He said despite a drastic decline in agricultural growth in the first quarter with slightly over 1pc compared to 8pc in the same quarter of last year, the GDP growth for FY25 would remain in the range of 2.5 to 3.5pc.

He said the country needs to pay$26.1bn in debt servicing in FY25. Out of this, $16bn was rolled over and out of the remaining $10bn, Pakistan has paid $6.4 billion, and the leftover $3.6bn would be paid till June 2025.

He said the situation was comfortable for the external account, adding that about $2.3-2.4bn was paid in debt servicing in Dec-Jan FY25.

He said the State Bank had prepared a platform for public investment in treasury bills and the Pakistan Investment Bonds (PIBS) while the work on digital currency was alsogoing on.

The Monetary Policy Committee (MPC) assessed that the impact of the significant reduction of 1000 bps in the policy rate since June 2024 would continue to unfold and support economic activity. The MPC statement said that the real policy rate needed to remain adequately positive on a forward-looking basis to stabilise inflation in the targetrange of5-7pc.

The decline in industrial sector growth in Q1-FY25 moderated relative to last year. The MPC noted that the downtrend in large-scale manufacturing-which has been pulling down industrial growth-has been driven by a few low-weight items, such as furniture. In contrast, key industrial sectors, such as textiles, food and beverages, and automobiles, had shown noticeable improvement.

External sector While the import bill outpaced export earnings, remittance inflows more than offset the widening trade deficit. Based on these trends, particularly the robust workers` remittances, the outlook for the current account balance has improved considerably.

Meanwhile,netfinancialinflows, though tepid during H1-FY25, are expected to improve going forward as a sizable part of official debt repayments has already been made. Consequently, the improved current account outlook, along with the expected realisation of planned financial inflows, is likely to increase the SBP`s FX reserves beyond $13 billion by June 2025.

Money and credit While the government`s borrowing from the banking system remained relatively contained and shifted to non-bank sources, banks` credit to the private sector grew sharply. This was mainly on account of the ongoing economic recovery, ease in financial conditions, and aggressive efforts by banks to meet the advances to deposit ratio (ADR) thresholds.

These factors also had an impact on bank deposits, which have declined noticeably since the last MPC meeting, whereas some increasein currencyin circulation was also noted during this period.

Inflation Underlying inflationary pressures-as indicated by core inflation-also moderated amid contained domestiedemand.Moreover,inflation expectations also remained volatile.

Based on these trends, the MPC reiterated its earlier assessment that the near-term inflation will remain volatile and was expected to increase close to the upper bound of the target range towards the end of FY25. On balance, the MPC expects headline inflation for FY25 to average between 5.5-7.5pc.

Analyst briefing At the subsequent analysts`briefing, the governor stated that discussions were underway with several commercial banks and multilateral partners to secure inflows, which were expected to materialise soon and will be sufficient to meet the country`s debt obligations.

Regarding the issuance of the new currency design, the target is to finalise the design and obtain allnecessary approvals within this FY, with printing scheduled to begin next fiscal year.

Industrial activity, particularly in the textile, food and beverages, automobile, and POL sectors, grew significantly during 1QFY25.

Domestic sales of cement, autos, and fertilisers also showed momentum, supported by recent data.

However, large-scale manufacturing (LSM) turned negative at -1.2pc, contrary to expectations, dragged down by low-weight items, like furniture.

Excluding furniture, LSM growth would have been positive at 1pc. During Jul-Oct 2024, fiscal and primary balances showed a surplus of 1.4pc and 3pc of GDP, respectively. However, despite a 26pc growth in the FBR revenue during 1HFY25, the tax collection shortfall widened.