Karachi, January 2025 – The State Bank of Pakistan (SBP) is poised to cut the monetary policy rate by 100 basis points (bps) in its upcoming meeting, following five consecutive reductions in 2024. This expected adjustment would lower the policy rate to 12%, according to a report by Arif Habib Limited.
The move follows a significant decline in inflation, which is projected to drop to 3.06% in January 2025 — the lowest level in nearly nine years. This represents a sharp fall from the 4.1% year-on-year (YoY) inflation recorded in December 2024, marking an 80-month low. In contrast, inflation during the same period last year was a staggering 29.7%.
Inflation Trends and Outlook
Inflation is expected to remain below 5% until April 2025, driven by a favorable base effect. However, experts foresee a reversal starting in May 2025, with inflation predicted to rise to 8.81% in May and 8.97% in June. This upward trend will likely occur as the base effect wanes after the first quarter of 2025.
The sharp decline in inflation is attributed to several factors, including the high base effect and the relatively stable Pakistani Rupee (PKR).
Economic Indicators Bolstering Rate Cut Expectations
Several economic indicators strengthen the case for a rate cut:
- Current Account Surplus: Pakistan posted a USD 729 million surplus in November 2024, the highest in nearly a decade. For the first five months of FY25, the surplus reached USD 944 million, a sharp contrast to the USD 1.68 billion deficit recorded during the same period last year.
- Remittance Growth: Remittances surged by 34% YoY in the first five months of FY25, totaling USD 14.8 billion, further boosting the country’s external position.
- Foreign Exchange Reserves: The SBP’s reserves increased to USD 11.7 billion by December 27, 2024, up from USD 9.4 billion in June 2024, supported by inflows from the IMF and Asian Development Bank (ADB).
These increased reserves provide the central bank with a cushion to lower interest rates without jeopardizing currency stability.
Real Interest Rate and Economic Implications
The real interest rate is expected to reach 9.98% in January 2025, significantly above the historical average of around 2.5%. Additionally, the spread between the policy rate and core inflation has historically averaged 1.7% over the past nine years, indicating that the SBP has room to maneuver.
Lowering the policy rate would help industries by reducing production costs, potentially boosting demand. This is especially crucial as large-scale manufacturing (LSM) growth experienced a 0.6% YoY decline in the first four months of FY25.
The SBP’s anticipated move aims to sustain economic recovery while ensuring stability in inflation and external accounts.
