In a major policy shift, the State Bank of Pakistan (SBP) announced a 100 basis points cut in the benchmark interest rate, bringing it down to 11 percent. The decision was unveiled on Monday following a meeting of the central bank’s Monetary Policy Committee (MPC).
This marks the first rate cut since March 10, when the MPC had opted to keep the rate unchanged after six consecutive cuts in previous sessions. The new policy rate will take effect from May 6, 2025.
Inflationary Pressures Ease
The MPC cited a significant decline in inflation during March and April as a key reason for the rate reduction. The easing was largely attributed to a reduction in administered electricity tariffs and a continued downtrend in food prices. Core inflation also softened in April, aided by favorable base effects and moderate demand.
While the inflation outlook has improved, the MPC acknowledged rising global uncertainty, particularly around trade tariffs and geopolitical tensions, which could pose risks to the economic outlook. The Committee stressed the importance of maintaining a measured monetary policy stance in light of these external challenges.
Economic Growth and External Position Improve
Pakistan’s economic recovery continued to gain momentum, with provisional real GDP growth reported at 1.7 percent year-on-year in Q2-FY25. Growth for Q1 was also revised upward to 1.3 percent from the earlier estimate of 0.9 percent, bringing cumulative H1-FY25 growth to 1.5 percent—broadly in line with expectations.
The MPC noted improving consumer and business confidence, driven by rising sales in automobiles and petroleum products, higher electricity generation, and a surge in remittances.
In March 2025, the current account recorded a surplus of $1.2 billion, supported by record-high workers’ remittances and SBP’s FX purchases. This brought the cumulative surplus for July-March FY25 to $1.9 billion. However, April’s trade data showed a sharp rise in the trade deficit to $3.4 billion, tempering the earlier positive trend.
Despite weak net financial inflows and large debt repayments, the SBP expects its foreign exchange reserves to rise to $14 billion by June 2025, with continued buildup anticipated in FY26.
Fiscal Performance and Reforms
While the Federal Board of Revenue (FBR) posted a robust 26.3 percent year-on-year growth in tax revenue for July-April FY25, collections remain below target. The MPC noted that an increase in Petroleum Development Levy (PDL) rates is likely to boost non-tax revenues in the coming months.
The overall fiscal deficit is expected to remain close to the FY25 target, but achieving the targeted primary surplus will be challenging. The Committee reiterated the need for structural reforms, especially in broadening the tax base and improving the performance of state-owned enterprises (SOEs). It welcomed recent legislative steps to enhance agriculture income tax collection at the provincial level.
Monetary Conditions and Credit Uptake
Broad money (M2) growth accelerated to 13.3 percent year-on-year as of April 18, up from around 11 percent in the previous MPC meeting. This was driven by an increase in both Net Domestic Assets (NDA) and Net Foreign Assets (NFA) of the banking system.
Private sector credit rose by 12.6 percent, reflecting improved financial conditions and rising economic activity. Borrowing increased across sectors such as textiles, refineries, chemicals, and fertilizers. There was also a notable uptick in auto financing and personal loans. Meanwhile, reserve money growth rose to 13.1 percent by April 18, partly due to seasonal Eid-related factors.
Inflation Outlook Remains Within Target Range
Headline inflation dropped to 0.3 percent in April, primarily due to lower food and energy prices, including a sharp decline in wheat prices and electricity tariffs. Core inflation also eased to 8 percent year-on-year in April from the persistent 9 percent seen in previous months.
While inflation is expected to inch up gradually in the coming months, the MPC anticipates it will stabilize within the 5–7 percent target range. However, risks remain, including volatility in food prices, adjustments in energy tariffs, and uncertainty in global commodity markets.
