KARACHI, January 27, 2025: The State Bank of Pakistan (SBP) has announced a 100 basis points reduction in the policy rate, bringing it down to 12%, effective January 28, 2025. The decision was unveiled by SBP Governor Jameel Ahmed during a press conference following the Monetary Policy Committee (MPC) meeting.
This marks the sixth consecutive policy rate cut, amounting to a cumulative reduction of 1,000 basis points since June 2024. The central bank’s decision aligns with the continued decline in inflation, which stood at 4.1% year-on-year in December 2024.
Key Highlights from the MPC Meeting:
- Inflation: While headline inflation has been on a downward trajectory, core inflation remains elevated. The MPC expects inflation to average between 5.5% and 7.5% for FY25, with near-term volatility anticipated due to global commodity price fluctuations and potential adjustments in energy tariffs.
- Economic Growth: High-frequency indicators show gradual improvement, with key sectors like textiles, food and beverages, and automobiles reporting growth. However, Q1-FY25 GDP growth stood at 0.9%, lower than the 2.3% recorded in Q1-FY24, largely due to a slowdown in the agricultural sector.
- External Sector: Pakistan’s current account posted a surplus of $0.6 billion in December 2024, bringing the H1-FY25 cumulative surplus to $1.2 billion. Strong remittances and export performance, particularly in high-value-added textiles, have improved the external outlook. The SBP’s foreign exchange reserves are projected to surpass $13 billion by June 2025.
- Fiscal Sector: Tax revenues grew by 26% in H1-FY25 but remain below target, posing challenges for achieving the annual fiscal goals. Lower-than-budgeted interest payments, however, are expected to help contain the fiscal deficit.
- Monetary and Credit Growth: Broad money (M2) growth decelerated to 11.3% as of January 17, 2025, compared to 13.3% in the previous meeting. Private sector credit grew sharply, reflecting improved economic conditions and banks’ efforts to meet the Advances to Deposit Ratio (ADR) thresholds.
Outlook and Risks:
Governor Jameel Ahmed emphasized that while the economic recovery is gaining traction, challenges persist. Inflationary pressures may resurface toward the end of FY25 due to volatile global oil prices, perishable food costs, and external uncertainties. The MPC reaffirmed its commitment to maintaining a cautious monetary policy stance to ensure price stability and sustainable growth.
The SBP’s decision comes as Pakistan navigates a mixed economic landscape, with improved remittances and exports offering optimism but fiscal and inflationary challenges necessitating vigilance.