The State Bank of Pakistan (SBP) reduced its policy rate by 200 basis points to 17.5% on Thursday, as headline and core inflation saw a sharper-than-expected decline over the last two months.

The rate cut will be effective from September 13, 2024.

The Monetary Policy Committee (MPC) of the SBP attributed this decision to falling global oil and food prices and a delay in the anticipated increase in administered energy prices.

The central bank, however, warned of potential risks tied to global economic volatility and domestic energy adjustments, urging a cautious approach to future monetary policies.

Inflation fell to 9.6% year-on-year in August, down from 12.6% in June.

Core inflation also dropped to 11.9%, reflecting improved supplies of food commodities and a reduction in domestic demand.

The MPC expects inflation to continue its downward trend but noted that risks remain, particularly related to the timing and scale of adjustments in energy tariffs and the course of global commodity prices.

The SBP’s foreign exchange reserves stood at $9.5 billion as of September 6, despite weak inflows and continued debt repayments.

Remittance inflows and a rebound in exports helped keep the current account deficit contained at $0.2 billion in July 2024.

While the industrial and services sectors are expected to benefit from this policy easing, the agriculture sector faces challenges due to an expected shortfall in cotton production.

Nonetheless, the SBP maintains its projection for GDP growth between 2.5% and 3.5% for FY25.

The central bank also reported that tax collection in July and August 2024 fell short of the Federal Board of Revenue’s (FBR) target, adding pressure on fiscal policy measures to meet revenue goals for the remainder of the year.

This will be critical for maintaining macroeconomic stability, the SBP noted.

The MPC reiterated that its cautious stance on monetary policy remains necessary to control inflation while supporting sustainable economic growth over the medium term.