KARACHI: The State Bank of Pakistan (SBP) announced a 100 basis point cut in its benchmark interest rate, reducing it to 12% on Monday, marking the lowest rate since 2022. The move aligns with expectations as declining inflation creates room for policymakers to stimulate economic growth.
The latest reduction brings the cumulative interest rate cut to 1,000 basis points since June 2024.
Inflation Outlook and Projections
SBP Governor Jameel Ahmad emphasized that while inflation rates have eased, core inflation remains elevated. The SBP revised its FY25 inflation forecast from 11.5-13.5% to 5.5-7.5%, indicating improved economic conditions.
Consumer Price Index (CPI) inflation dropped significantly to 4.1% in December, supported by moderated domestic demand and supply-side improvements. However, risks such as fluctuating global commodity prices and potential energy tariff adjustments could still impact inflation in the coming months.
Economic Growth and Policy Goals
The central bank maintained its GDP growth forecast for FY25 at 2.5-3.5%, with the Monetary Policy Committee (MPC) optimistic about the positive effects of the cumulative rate cuts on economic activity. The report highlighted potential reductions in unemployment as economic momentum builds.
Key economic indicators showed improvement:
- Remittance inflows surged, bolstering the current account balance.
- Fiscal sustainability improved, supported by declining markup expenditures and lower borrowing costs.
- The external account benefitted from reduced debt repayments and anticipated financial inflows.
SBP reserves are expected to surpass $13 billion by June 2025, with a manageable external debt repayment balance of $3.6 billion for the remainder of FY25.
Key Challenges and Reforms
Despite improvements, structural challenges such as fiscal rigidity, public debt, and trade imbalances remain. Governor Ahmad assured that ongoing reforms and resilience would address these issues.
The Finance Ministry’s H1-FY2025 State of Economy Report echoed the SBP’s optimism, forecasting inflation stabilization near 7% in the coming quarters. This, coupled with lower borrowing costs, is expected to encourage private-sector investment and fuel growth in key sectors like large-scale manufacturing and services.
Regional Disparities in Inflation
Urban areas recorded higher inflation (8.7%) compared to rural areas (5.1%) in H1-FY2025, attributed to stronger wage pressures and higher non-food inflation in cities, while rural areas benefited from improved agricultural output.
Looking Ahead
The SBP expressed confidence in maintaining the positive economic trajectory, with ongoing IMF reviews and enhanced inflows from remittances and exports providing further support. The anticipated stability in inflation and interest rates sets the stage for continued economic recovery and growth.