Pakistan’s central bank is expected to cut its key interest rate by at least 1 percentage point on Monday, marking its sixth consecutive reduction. This move aims to boost economic activity and business sentiment as inflation continues to decrease sharply.
Since June 2024, the State Bank of Pakistan (SBP) has lowered its rates by 900 basis points from a peak of 22%, making it one of the most aggressive rate cutters among emerging markets. This follows a similar pattern seen in 2020 during the COVID-19 pandemic when the SBP reduced rates by 625 basis points.
The SBP’s Monetary Policy Committee is scheduled to meet on January 27, with analysts predicting further rate cuts. The median forecast from 15 analysts surveyed by Reuters is a 100 basis point reduction, although opinions vary. One analyst expects the rate to remain at 13%, while the others anticipate cuts ranging from 100 to 200 basis points.
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Ahmad Mobeen, senior economist at S&P Global Market Intelligence, suggests a 150 basis point cut based on December’s low inflation figures and a stable exchange rate supported by a healthier current account balance. Pakistan’s consumer inflation rate fell to a 6.5-year low of 4.1% in December, largely due to a high year-ago base. This decrease was well below government expectations and a sharp contrast to the 40% inflation seen in May 2023.
Despite this progress, inflation could rise again in May due to base effects and potential risks such as higher energy tariffs, new taxes, and increases in petroleum levies, according to Saad Hanif, a research analyst at Ismail Iqbal Securities. He expects a 100 basis point reduction in rates.
Pakistan’s economic recovery remains challenging, though the country has been supported by a $7 billion loan facility from the International Monetary Fund (IMF) since September.
