SBP Cuts Policy Rate to 12% Amid Easing Inflation and Economic Recovery

The State Bank of Pakistan (SBP) announced a 100 basis point reduction in its policy rate, bringing it down to 12%, effective January 28. This decision follows the Monetary Policy Committee’s (MPC) meeting and reflects moderating inflation and improved economic indicators.

This is the sixth rate cut since June 2024, marking a total reduction of 1,000 basis points.

Why Was the Policy Rate Cut?

SBP Governor Jameel Ahmed highlighted that inflationary pressures have eased, with year-on-year inflation falling to 4.1% in December 2024. Key factors include:

  • Easing demand pressures
  • Stable exchange rates
  • Favourable base effects

Despite this, core inflation remains elevated, prompting the SBP to proceed cautiously. The central bank forecasts average inflation for FY25 to range between 5.5% and 7.5%, with some short-term volatility.

Improving Economic Indicators

The SBP noted signs of recovery in Pakistan’s economy:

  • Higher sales in automobiles, fertilisers, and petroleum products
  • Increased private-sector credit
  • Real GDP growth of 0.9% in Q1 FY25 (slightly below expectations due to weak agricultural performance)

On the external front, Pakistan recorded a $600 million current account surplus in December 2024, driven by strong remittances and export earnings, particularly in high-value-added textiles. For the first half of FY25, the current account surplus reached $1.2 billion.

The SBP projects the current account balance to remain stable, ranging between a surplus and a deficit of 0.5% of GDP for FY25.

Challenges Ahead

Despite positive trends, challenges remain:

  • Tax revenue growth of 26% in H1 FY25 fell short of the government’s target.
  • Fiscal discipline has improved, but achieving the primary balance target is uncertain.
  • Global uncertainties, including volatile oil prices, could impact economic stability.

The SBP also noted that foreign exchange reserves, under pressure from debt repayments, are expected to exceed $13 billion by June 2025, as planned inflows materialize.

Conclusion

The SBP’s decision to reduce the policy rate reflects a cautious yet optimistic outlook. While headline inflation has declined, challenges like core inflation and fiscal performance persist. The central bank remains focused on maintaining economic stability while supporting growth.

About Khashif Sarfraz

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