SBP to cut rates by 50bps, say analysts

KARACHI: The State Bank of Pakistan is likely to lower its benchmark interest rate on Wednesday, thanks to a decline in inflation and an improvement in the external account, according to analysts, with most expecting a 50 basis points (bps) reduction.

Pakistan’s central bank began cutting rates from a record high of 22 percent in June 2024. After dropping rates by 10 percentage points, it paused in March. Although the SBP lowered rates by a further 100bps in May, it chose to hold rates steady in June due to escalating tensions between Iran and Israel.

The majority of analysts and financial market polls expect the SBP’s Monetary Policy Committee (MPC) to reduce interest rates, focusing on the extent of easing at its meeting on Wednesday. While a 50bps cut in the policy rate is widely expected, some forecasters anticipate a substantial easing of 100bps. However, some analysts expect the SBP to stay cautious.

Pakistan’s consumer price index inflation clocked in at 3.2 per cent in June, and the annual inflation rate for the fiscal year that ended on June 30 decreased to a nine-year low of 4.49 per cent from 23.41 per cent the year before.

“We expect the SBP to resume monetary easing, as the ease in geopolitical tensions shifts focus toward improving macroeconomic indicators,” said Awais Ashraf, director of research at AKD Securities, in a note.

“The SBP’s decision is likely to be driven by elevated real interest rates amid subdued inflation, a two-decade high current account surplus, foreign exchange reserves at a 3.3-year high, and sluggish economic activity as reflected by muted LSM growth,” Ashraf said.

“We expect the MPC to cut the policy rate by 50bps to 10.5 per cent, followed by an additional 100bps of easing over the remainder of CY25,” he added.

The country’s external position is currently in a manageable zone, and analysts expect foreign exchange reserves to continue growing, supported by the International Monetary Fund’s inflows under the $7 billion loan programme, robust worker remittance inflows, lower interest payments, and renewed access to international markets following credit rating upgrades. The SBP’s reserves have increased to over $14 billion.

The rupee has been stabilised after facing pressures due to a crackdown on currency smuggling by the law enforcement agencies.S&P Global upgraded Pakistan’s rating to ‘B-’ with a stable outlook last week amid lower inflation, fiscal consolidation, and improved reserves.

“With inflation down, growth picking up, and the external position far stronger than a year ago, SBP has the macro space to ease, and the market expects it to act. But the road ahead needs cautious navigation,” said Sana Tawfik, head of research at Arif Habib Limited.“A 50bps cut now could reinforce confidence, unlock industrial recovery, and sustain the current growth pulse,” Tawfik added.

Maaz Azam, an analyst at Optimus Capital Management, expects headline CPI to remain contained at 3.3 per cent year-on-year in July, with core inflation also easing to near 7.0 per cent. However, he forecasts policy caution to continue.

“While this provides room for further monetary easing and the market has priced it in the same, SBP is likely to maintain a cautious approach. A measured approach will help sustain macro stability and extend the recovery cycle without risking renewed imbalances,” Azam said.

Reuters adds: All 14 analysts surveyed expect the State Bank of Pakistan to cut rates, with nine projecting a 50bps cut -- also the median forecast -- while four see a deeper 100bps cut and one a 25bps reduction.

Earlier this month, SBP Governor Jameel Ahmad told the Reuters NEXT Asia summit that the central bank would maintain a ‘tight’ stance to stabilise inflation within its 5-7 per cent target, adding that its policy was already affecting both inflation and the external account.

Ahmed Mobeen, senior economist at S&P Global Market Intelligence, said the SBP is likely to cut rates further but may adopt a more “cautious” pace in the second half of the year due to rising import demand and global commodity risks.

Mustafa Pasha, chief investment officer at Lakson Investments, said the central bank could gradually lower rates into the high single digits in the first half of 2026, given stronger buffers and the completion of the budget and IMF review.