In its latest meeting, the Monetary Policy Committee (MPC) announced a 200 basis points reduction in the policy rate, bringing it to 13%, effective December 17, 2024. This decision follows a decline in headline inflation to 4.9% year-on-year in November 2024, driven by lower food prices and the waning impact of previous gas tariff hikes. However, core inflation remains sticky at 9.7%, and inflation expectations are volatile. The MPC anticipates near-term inflationary fluctuations but expects stabilization within the target range of 5–7%.
Economic growth indicators have shown improvement, with high-frequency data reflecting increased industrial activity and better agricultural output, such as higher-than-expected cotton arrivals and promising wheat sowing trends. These developments, combined with easing financial conditions and enhanced business confidence, are expected to boost real GDP growth in FY25, projected to reach 2.5–3.5%.
On the external front, the current account surplus continues, supported by strong exports and remittances, alongside favorable global commodity prices. Exports grew by 8.7%, primarily due to high-value-added textiles, rice, and petroleum products. This surplus, coupled with rising foreign reserves, is expected to keep the current account deficit near the lower end of 0–1% of GDP in FY25, with foreign exchange reserves projected to exceed $13 billion by June 2025.
Fiscally, the first quarter of FY25 showed improvements in overall and primary balances. While tax revenue growth at 23% year-on-year falls short of the annual target, lower interest payments on domestic debt are likely to support fiscal consolidation. However, achieving a primary surplus will require additional efforts and reforms to broaden the tax base.
Monetary indicators reflect a deceleration in broad money growth due to reduced government borrowing, while private sector credit increased significantly. Consumer financing also saw a rise, driven by easing financial conditions.
Inflation eased further in November, aided by lower food prices and favorable global commodity trends. Headline inflation is projected to remain below earlier estimates for FY25, although risks include potential revenue measures, global price increases, and a resurgence in food inflation. The MPC views the current monetary policy stance as appropriate to stabilize inflation within its target range.
