The State Bank of Pakistan (SBP) has announced a 100 basis point reduction in its key policy rate, lowering it from 13% to 12%, in response to the declining inflation trend. The decision, made during a meeting of the Monetary Policy Committee (MPC) on Monday, marks the latest move in a series of rate cuts since June 2024, when the policy rate stood at 22%. This latest reduction brings the total rate cut to 1,000 basis points over six intervals.
SBP Governor Jameel Ahmed, in a press conference following the announcement, stated that the decision to cut the interest rate was based on the current inflation outlook and other economic developments. He noted that inflation had been trending downward, reaching 4.1% year-on-year in December 2024, which was in line with the bank’s expectations. The decline in inflation has been attributed to moderate domestic demand conditions and supportive supply-side dynamics, alongside a favorable base effect.
Governor Ahmed also highlighted the positive trend in remittances and export numbers, which have helped support the country’s current account. He added that the central bank remained focused on achieving its target of $13 billion in foreign exchange reserves by the end of June 2025.
While inflation was expected to continue decreasing in January, the SBP governor cautioned that core inflation remains high. The central bank’s statement emphasized that, despite the overall decline in inflation, core inflation continues to be elevated, signaling that challenges remain in the economy.
The MPC’s statement also pointed out that real GDP growth had been lower than anticipated, and while the current account remained in surplus for December 2024, the SBP’s foreign exchange reserves had declined due to low financial inflows and high debt repayments. The committee also noted that tax revenues, although higher in December, still fell short of targets, and global oil prices remained volatile.
In light of these developments, the SBP maintained a cautious approach to monetary policy, underscoring the need for stability in prices and careful management of economic risks.
This rate cut follows a reduction in the cut-off yields on treasury bills (T-bills) in a recent government auction, which further reflects the likelihood of additional rate cuts in the near future. The government had reduced the return on 12-month T-bills by 41 basis points, bringing the total reduction in January to 90 basis points.
Financial analysts had widely anticipated the SBP’s decision to cut the policy rate by 100 basis points, given the ongoing improvements in inflation and other economic indicators. The rate cut is expected to have a significant impact on borrowing costs, consumer spending, and overall economic growth in the coming months.
Samra Zulfiqar, a real estate analyst at Zameen.com, is passionate about finding projects that offer buyers the best returns. Her keen insights spotlight the market’s most promising opportunities.
