SBP cuts interest rate to 12%, lowest in nearly three years

KARACHI: The State Bank of Pakistan (SBP) cut its benchmark interest rate by 100 basis points to 12 percent on Monday, aligning with expectations as declining inflation provides room for policymakers to boost growth.

The latest rate reduction has brought the cumulative interest rate cut to 1,000 basis points (bps) since June 2024.

Governor central bank Jameel Ahmad told reporters here after the monetary policy meeting that the inflation rate was expected to decline further in January, but core inflation remains high.

He said the SBP had revised its inflation projections for FY25 from an earlier estimate of 11.5-13.5 percent to a new range of 5.5-7.5 percent.

“Considering these developments and evolving risks, the Committee viewed thata cautious monetary policy stance was needed to ensure price stability, which was essential for sustainable economic growth,” the SBP said in a statement.

The Monetary Policy Committee (MPC) believes that significant reduction of 1,000 bps in the policy rate will continue to positively impact economic activity.

In December, the consumer price index inflation rate slowed to 4.1 percent, aided by moderate domestic demand and supportive supply-side conditions, as well as a favourable base effect.

Looking ahead, the inflation outlook is subject to risks from fluctuating global commodity prices, protectionist policies in major economies, the timing and extent of energy tariff adjustments, volatile prices for perishables, and any additional measures required to meet revenue targets, the SBP said.

The SBP has maintained a FY25 full-year GDP growth forecast of 2.5-3.5 percent. The central bank also noted that the outlook for the current account balance has significantly improved due to a surge in remittances and is now expected to remain between a surplus and a deficit of 0.5 percent of GDP in FY25.

Although net financial inflows have been modest during the first half of FY25, they are anticipated to improve moving forward, as a significant portion of official debt repayments has already been made.

As a result, the improved current account outlook, along with the expected realization of planned financial inflows, is likely to boost the SBP’s foreign exchange reserves beyond $13 billion by June 2025.

The governor mentioned that he was confident that the IMF review will proceed as planned, with the IMF conducting its first review of the loan in March.

Ahmad indicated that the rising trend in remittances, the Roshan Digital Account, and exports will help maintain the current account at a comfortable level this fiscal year. He explained that out of $26.1 billion in external debt repayments for FY25, the net amount adjusted for rollover/refinance is $10 billion, with $6.4 billion already paid. For the remainder of FY25, the net repayable amount is $3.6 billion.

He also noted that most of the debt had already been repaid, including nearly $2.4 billion in foreign debt repaid in December and January, during a period of high year-end maturities. Ahmad mentioned that the expected inflows in the second half of this fiscal year from commercial banks and bilateral sources were likely to offset the outflows. As a result, there should be no pressure on forex reserves buildup.

Mehtab Haider reports: Meanwhile, the finance ministry has anticipated that inflation is expected to stabilise near the long-term average of 7 percent in the Jan-March quarter, fostering conditions conducive to the economic activity.

The ministry Monday released the State of Economy Report for the first half (July-Dec) period stating that the gaining momentum of the economic activities indicated potential reductions in unemployment but never explained how much reduction in unemployment could be achieved.

The report highlights Pakistan’s resilience and adaptability in the face of a dynamic global and domestic economic landscape. Positive developments in key sectors underscore the impact of targeted reforms, sound fiscal management, and strategic interventions.

Effective fiscal consolidation efforts, combined with a prudent debt management strategy, are expected to maintain the downward trajectory of debt to GDP ratio.

The external sector has made progress in balancing trade dynamics, with remittances and foreign investments bolstering external accounts. Stable foreign exchange reserves further contribute to economic stability.

Despite facing global challenges, including a moderate recovery in international trade and geopolitical uncertainties, Pakistan’s economy shows promising signs of sustainable growth.

The decline in inflationary pressures, easing policy rates, and stable commodity prices have created a favourable environment for investment and private sector-led expansion. However, persistent issues, such as structural imbalances, fiscal rigidity, and high public debt, require continued reform efforts.

The economic outlook for Pakistan is encouraging, underpinned by stabilizing macroeconomic fundamentals and a gradual recovery of key sectors. Inflation is expected to stabilize near the long-term average of 7 percent in the coming quarters, fostering conditions conducive to economic activity.

“This anticipated stability will likely facilitate further reduction in policy rates, lowering borrowing costs for both businesses and consumers,” the report says. Such a shift is expected to boost investment and economic momentum, particularly in LSM and services, which are key growth drivers this year broader economic activity.

Remittance inflows are expected to maintain their upward trend, contributing to a more stable external account and boosting household consumption. On the fiscal side, a significant decline in markup expenditures, supported by reduced borrowing costs, will enhance fiscal sustainability. This development not only strengthens public finances but also provides room for further economic recovery initiatives. Importantly, these trends indicate potential reductions in unemployment as economic activity gains momentum. With sustained reforms and resilience, Pakistan’s economy is on a path toward greater stability and prosperity.

Inflation remained persistently elevated at 23.4 percent in FY2024 after reaching multi-decade high of 29.2 percent in FY2023. However, the government’s measures led to a notable decline in inflation in H1-FY2025, as the Consumer Price Index (CPI) inflation dropped to 7.2 percent from 28.8 percent last year. This substantial reduction in inflation highlights the effectiveness of an optimal policy mix, including fiscal consolidation, targeted interventions by the State Bank of Pakistan (SBP), and exchange rate stability, alongside favourable external conditions.

Urban Food inflation experienced a pronounced decline, dropping to 2.7 percent in H1-FY2025 from 33.2 percent in the corresponding half of previous year. Rural food inflation was recorded at 0.4 percent compared to 33.2 percent in H1-FY2024.

Regional disparities in inflation rates were observed in H1-FY2025, with urban areas experiencing a CPI inflation rate of 8.7 percent, while rural areas recorded a lower rate of 5.1 percent.

The higher inflation in urban areas can be attributed to stronger wage pressures and higher non-food inflation, whereas rural areas benefited from improved agricultural output, which helped contain inflationary pressures.