Karachi, January 2025 – The State Bank of Pakistan (SBP) is expected to announce a 100 basis points (bps) cut in the monetary policy rate during its upcoming meeting, following five consecutive reductions in 2024. The anticipated adjustment would bring the policy rate down to 12%, as per a report by Arif Habib Limited.
The move comes amid a significant decline in inflation, which is forecasted to hit 3.06% in January 2025 — the lowest level in nearly nine years. This marks a sharp drop from 4.1% year-on-year (YoY) inflation recorded in December 2024, an 80-month low. By comparison, inflation during the same period last year stood at a staggering 29.7%.
Inflation Trends and Outlook
Inflation is projected to remain below 5% until April 2025, driven by a favorable base effect. However, experts predict a reversal starting May 2025, with inflation expected to rise to 8.81% in May and 8.97% in June. This upward trend will likely emerge as the base effect dissipates after the first quarter of 2025.
The sharp decline in inflation has been attributed to multiple factors, including the high base effect and a relatively stable Pakistani Rupee (PKR).
Economic Indicators Bolster Rate Cut Expectations
Several economic indicators support the likelihood of a rate cut:
- Current Account Surplus: Pakistan recorded a surplus of USD 729 million in November 2024, the highest in nearly a decade. For the first five months of FY25, the surplus reached USD 944 million, a stark contrast to the USD 1.68 billion deficit during the same period last year.
- Remittance Growth: Remittances surged 34% YoY in 5MFY25, totaling USD 14.8 billion, further strengthening the country’s external position.
- Foreign Exchange Reserves: The SBP’s reserves grew to USD 11.7 billion as of December 27, 2024, up from USD 9.4 billion in June 2024, supported by inflows from the IMF and Asian Development Bank (ADB).
The increased reserves provide the central bank with a cushion to lower interest rates without risking currency instability.
Real Interest Rate and Economic Implications
The real interest rate is expected to reach 9.98% in January 2025, significantly higher than the historical average of ~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.
A reduction in the policy rate would also help industries by lowering production costs, potentially boosting demand. This is especially critical as large-scale manufacturing (LSM) growth saw a 0.6% YoY decline in the first four months of FY25.
The SBP’s expected move aims to sustain economic recovery while maintaining stability in inflation and external accounts.
Source: ProPakistani
