KARACHI: Pakistan’s central bank cut its key interest rate by 100 basis points to 11 percent on Monday, surpassing expectations, in response to an improved inflation outlook and to protect the country’s economy from steep U.S. tariffs and geopolitical tensions.
Most analysts and respondents in various polls conducted over the past few weeks expected no change in interest rates. Some forecasted a 50 bps cut, while only a few predicted a reduction of 100 bps. The State Bank of Pakistan has resumed its cycle of rate cuts following a pause in its last meeting in March. With the current reduction, the policy rate has fallen to its lowest level in three years, resulting in a cumulative cut of 11 percentage points since June 2024.
The SBP’s Monetary Policy Committee observed a significant decline in inflation between March and April, mostly attributed to a fall in energy and food prices. Headline inflation eased to 0.3 percent in April, down from 0.7 percent in the
previous month. Additionally, core inflation, which had remained around 9 percent for several months, slowed to 8 percent in April. This decline is largely due to a favorable base effect in the context of moderate demand conditions.
“Overall, the MPC assessed that the inflation outlook has improved further relative to the previous assessment,” the SBP said in the monetary policy statement.
“At the same time, the Committee viewed that the heightened global uncertainty surrounding trade tariffs and geopolitical developments could pose challenges for the economy. In this backdrop, the MPC emphasised the importance of maintaining a measured monetary policy stance,” it added.
The SBP’s decision was made in the context of escalating tensions with neighbouring India following a lethal assault on tourists in Indian Kashmir. Both nations with nuclear weapons have declared measures to undermine one another’s economies.
SBP move comes ahead of a loan review by the International Monetary Fund (IMF) on May 9, which is set to release the next tranche of $1 billion from a total bailout of $7 billion for Pakistan.
On Monday, the ratings agency Moody’s issued a warning that rising tensions could negatively impact Pakistan’s economy, hinder fiscal consolidation, and put pressure on foreign-exchange reserves. This situation could potentially affect the country’s access to external financing.
The SBP has prioritised economic growth over caution this time while maintaining its real GDP growth projection for FY25 in the range of 2.5 percent to 3.5 percent. It expects growth to accelerate further in FY26. However, this outlook carries risks, particularly due to global uncertainties and unfavorable weather conditions anticipated for the upcoming Kharif season. Pakistan’s economy grew by 1.7 percent in the second quarter of FY25, an increase from 1.3 percent in the first quarter.
“On balance, considering the evolving developments and risks, the MPC viewed that the real policy rate remains adequately positive to stabilise inflation in the target range of 5–7 percent while ensuring that the economy grows on a sustainable basis,” the SBP said.
The central bank has projected that foreign exchange reserves will increase to $14 billion by the end of June 2025. This growth is expected to be supported by current account surpluses and anticipated financial inflows, including those related to the IMF loan programme. The bank expects this accumulation of foreign exchange reserves to continue in fiscal year 2026. However, MPC has cautioned that this outlook carries risks, particularly due to the uncertain global economic and trade environment.
Central Bank Governor Jameel Ahmad told analysts in a briefing following the rate cut decision that import volumes have increased, signaling an economic recovery. However, a decline in global oil prices has kept the overall import bill manageable, in line with the SBP’s projections.
He noted that U.S. tariffs are unlikely to have an immediate negative impact on Pakistan’s economy in the short term. He explained that lower commodity prices will provide higher benefits in imports compared with any losses in exports resulting from the imposition of tariffs.
According to the SBP, Pakistan’s total external debt servicing requirement for the current fiscal year was $26 billion, of which $16 billion was expected to be rolled over. Most rollovers have already been secured, and the remaining amounts will be addressed as they become due. From the $10 billion due, $8.5 billion has been repaid, with the remaining $1.3 billion scheduled for repayment in May and June 2025.
Remittances reached a record high in March, increasing to $4.1 billion. The SBP expects these inflows to hit approximately $38 billion for the entire fiscal year 2025. According to the SBP, the quality of foreign exchange reserves is improving, as forward liabilities have been significantly reduced, enhancing reserve sustainability. Ongoing SBP interventions have contributed to the buildup of the country’s foreign exchange reserves.
The SBP confirmed that Pakistan’s IMF programme is on track, with the first review concluded and the IMF executive board meeting scheduled for May 9. The SBP stated that no renegotiation with the global lender is currently needed, even in light of new external challenges such as tariffs or geopolitical tensions.