Mooaz Manzoor

The State Bank of Pakistan (SBP) should adopt a cautious and gradual approach to rate cuts in 2025 to balance growth ambitions, control inflation, and maintain external sector stability.

This is the gist of  the opinions gathered by WealthPK in an interaction with experts.

Dr. Sajid Amin Javed, Deputy Executive Director Sustainable Development Policy Institute (SDPI), emphasized a gradual approach to the policy rate adjustments. He noted that while the central bank resisted market pressures for drastic rate cuts in 2024, the strategy of incremental reductions, initially at 100 basis points and later moving to 200 basis points, had been prudent.

However, he cautioned that continuing at the current pace of 200 basis point cuts could pose risks to inflation and economic stability in the coming year. Core inflation, which has remained steady at 8-9%,  requires close monitoring. The current monetary policy appears aligned with the economic fundamentals with an inflation target space of around 13%, including a 3-4% margin.

However, external factors like persistent energy inflation and potential resurgence of energy taxation for revenue collection could disrupt this balance. Dr. Javed also pointed to the fragile state of key sectors, such as agriculture, which has experienced significant setbacks, notably in wheat production. These issues, compounded by a low-growth current account, underscore the need for careful monetary planning.

He further highlighted the interplay between the government's high-growth agenda, such as the prime minister's development plans and the "Uraan Pakistan" initiative, and the risks to the current account. High growth ambitions could trigger pressure on the current account balance, which is presently in surplus, potentially pushing it into a deficit.

This, in turn, might exert pressure on the rupee, causing it to depreciate and subsequently fuel inflation. Dr. Javed advised the SBP to keep vigil over core inflation and consider scaling back to more minor rate cuts, such as 100 basis points, to ensure a balanced approach to growth and stability. Echoing these concerns, Muhammad Waqas Ghani, Deputy Research Head at JS Global, underscored the importance of a cautious approach to interest rate reductions.

He pointed out that while the balance of payments (BoP) position remains positive, clocking in at $1.7 billion for the first half of FY25, aggressive rate cuts could destabilize inflation and strain the BoP. Any disruption in the BoP position would undermine the central bank's efforts to stabilize the rupee and manage inflation expectations effectively.

Both experts agree that a gradual and measured monetary policy is vital for sustaining economic stability in 2025. While the current inflation and BoP positions offer room for policy maneuvering, any abrupt decisions could erode the hard-earned stability achieved in 2024. Dr. Javed suggests that the SBP adopt a cautious approach in 2025, ensuring that inflationary pressures and external vulnerabilities remain under control.

Credit: INP-WealthPk