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KARACHI :Pakistan’s central bank cut its benchmark interest rate by 100 basis points to 12 per cent on Monday, in line with expectations, as the bank expects an uptick in economic activity after 1,000 basis points of rate cuts over the last six months.
The State Bank of Pakistan has slashed rates from an all-time high of 22 per cent last June, one of the most aggressive moves among central banks in emerging markets and exceeding its 625 bps of rate cuts in 2020 during the COVID-19 pandemic.
The bank’s governor Jameel Ahmad said at a press conference that the inflation rate would ease further in January but noted core inflation remained elevated. He said the forecast for full-year inflation in the year to June was an average of 5.5 per cent-7.5 per cent.
“Considering these developments and evolving risks, the Committee viewed that a cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth,” the bank’s monetary policy committee (MPC) said in a statement accompanying the decision.
“In this regard, the MPC assessed that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5 – 7 per cent.”
Fourteen of 15 analysts surveyed by Reuters expected the central bank to cut its key rate by at least 100 bps mainly due to a drop in inflation.
Pakistan’s consumer inflation rate slowed to an over 6-1/2-year low of 4.1 per cent in December, largely due to a high year-ago base. That was below the government’s forecast and significantly lower than a multi-decade high of around 40 per cent in May 2023.
The governor said the bank maintained its forecast of full-year GDP growth at 2.5 per cent-3.5 per cent and said economic growth would pick up in the next six months, which would help boost the country’s previously struggling foreign exchange reserves.
“The improved current account outlook, along with the expected realization of planned financial inflows, is likely to increase the SBP’s FX reserves beyond $13 billion by June 2025,” the bank’s statement said.
However the SBP also highlighted several risks for inflation, including protectionist policies by “major economies”. United States President Donald Trump has said he is considering imposing tariffs on goods from several countries.
Pakistan’s economy grew 0.92 per cent in the first quarter of fiscal 2024-25 which ends in June, according to data approved by the National Accounts Committee and released by its Statistics Bureau in December.
