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.