The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to lower the key policy rate by 100 basis points, bringing it down to 12%, effective January 28, 2025. This marks the sixth consecutive interest rate cut since June 2024, when the rate stood at 22%.
In a statement following its latest meeting, the MPC noted that inflation continued to trend downward, with the year-on-year inflation rate falling to 4.1% in December 2024. This decrease is attributed to moderate domestic demand, favorable supply-side dynamics, and a beneficial base effect.
While inflation is expected to continue declining in January, it may rise slightly in the following months. The MPC acknowledged that although core inflation is easing, it remains at elevated levels. Meanwhile, high-frequency indicators show gradual improvement in economic activity, and the impact of the cumulative 1,000 basis point reduction in the policy rate since June 2024 is expected to support further economic growth.
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At its December 2024 meeting, the MPC had previously cut the policy rate by 200 basis points, bringing it to 13%. The committee’s current stance reflects a cautious approach amid global uncertainties and domestic economic challenges.
Several developments since the MPC’s last meeting have shaped its decision:
- Real GDP Growth: Growth in the first quarter of FY25 was slightly lower than expected.
- Current Account Surplus: Pakistan’s current account remained in surplus in December 2024, though the SBP’s foreign exchange reserves declined due to low financial inflows and high debt repayments.
- Tax Revenues: Tax revenues in the first half of FY25 were below target, despite a significant increase in December.
- Global Oil Prices: Oil prices have shown increased volatility recently, adding to global economic uncertainty.
The MPC emphasized the need for a cautious monetary policy to maintain price stability and foster sustainable economic growth. It reiterated that the real policy rate must remain positive to control inflation, which it expects to stay within the 5-7% target range in the medium term.
Inflation Outlook and Risks
The MPC identified several factors driving the decline in inflation, including lower electricity tariffs, stable food supplies, a steady exchange rate, and a favorable base effect. However, core inflation remains a concern, and inflation expectations are volatile. The committee expects inflation for FY25 to average between 5.5% and 7.5%, but noted risks such as fluctuating global commodity prices, protectionist policies, energy tariff adjustments, and volatile food prices.
Most market experts anticipated a 100 basis point rate cut. Brokerage firm JS Global projected a policy rate cut of at least 100 basis points, with 79% of survey participants expecting this outcome. Similarly, Arif Habib Limited (AHL) forecasted a 100 basis point cut, with 68.4% of its survey respondents predicting this move.
The previous MPC meeting in December highlighted positive growth prospects, supported by high-frequency economic indicators, despite inflationary and external account pressures. Economic developments since that meeting included a slight depreciation of the rupee and a modest increase in petrol prices. On the international front, oil prices rose above $79 per barrel, adding to global economic uncertainties.
Pakistan’s inflation for December 2024 was recorded at 4.1% year-on-year, a decrease from 4.9% in November 2024. The country’s current account posted a surplus of $582 million in December 2024, a 109% increase compared to the previous year. However, the SBP’s foreign exchange reserves decreased to $11.45 billion as of January 17, 2025, a decrease of $276 million from the previous week.
With a cautious approach, the MPC’s latest decision aims to balance economic growth and inflation control, while addressing external challenges and global uncertainties.
