State Bank Cuts Interest Rate to 13% to Support Economic Growth Amid Declining Inflation

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The State Bank of Pakistan (SBP) reduced its benchmark interest rate by 200 basis points to 13% on Monday, marking the fifth rate cut this year as part of efforts to revive the country’s sluggish economy and address falling inflation.

This recent rate reduction brings interest rates to their lowest level since April 2022. After peaking at 22% in May and June 2024, Pakistan has experienced significant easing in monetary policy, with a total rate cut of 900 basis points in 2024 due to easing inflationary pressures.

The SBP highlighted that the rate cut was necessary to stimulate domestic economic activity, encourage investment, boost employment, and increase tax revenues amid a prolonged economic slowdown. The central bank also acknowledged that while core inflation remains high at 9.7%, the overall inflation rate dropped to 4.9% in November due to lower food inflation and reduced gas tariff impacts.

Despite improving economic indicators, such as a rise in remittances and stable foreign exchange reserves, the SBP noted that inflation remains volatile, and risks such as food price fluctuations and global commodity price hikes could affect the inflation outlook. The SBP forecasts inflation to remain below its earlier projection of 11.5-13.5% for FY25.

The central bank also projected GDP growth to be between 2.5% and 3.5%, with a current account surplus expected to improve further. However, achieving the targeted primary surplus remains a challenge, requiring fiscal reforms to broaden the tax base.

The interest rate cut has had a positive impact on investor sentiment, reflected in the surge of the Pakistan Stock Exchange (PSX), with the KSE-100 index surpassing 116,000 points for the first time. The government has also welcomed the rate reduction, hoping it will boost investor confidence and further drive the country’s economic recovery.

Additionally, the SBP expects foreign exchange reserves to exceed $13 billion by June 2025, as the country continues to benefit from strong remittance inflows and improving economic activity.