Pakistan – Economy
The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has cut the key policy rate by 100 basis points, bringing it down to 12%, in line with expectations. This decision was made during a meeting held today, with SBP Governor Jameel Ahmed addressing the media.
In his statement, the governor explained that the rate cut was influenced by the outlook on inflation and other recent developments. He noted a positive trend in remittances and expressed confidence that inflation would decline in January. However, he cautioned that core inflation remains high.
“The cautious approach was adopted considering these factors,” Governor Ahmed said. He also emphasized that both remittances and export numbers were performing well, supporting a favorable current account balance.
On the topic of foreign exchange (FX) reserves, the governor reaffirmed the central bank’s target of reaching $13 billion by the end of June 2025.
Later, the SBP released a statement noting that inflation had been trending downward as expected, reaching 4.1% year-on-year in December. This decline was attributed to moderate domestic demand, supportive supply-side factors, and a favorable base effect. The statement indicated that inflation is expected to continue decreasing in January but may rise slightly in the following months. Despite this, core inflation remains high.
The statement also highlighted gradual improvements in economic activity, as indicated by high-frequency data.
Key developments discussed by the MPC included lower-than-expected real GDP growth and a surplus in the current account for December 2024. However, the SBP’s FX reserves declined due to low financial inflows and high debt repayments. Tax revenues, despite a substantial increase in December, still fell short of targets. Additionally, global oil prices showed increased volatility in recent weeks.
Given these factors and emerging risks, the MPC concluded that a cautious monetary policy stance was necessary to ensure price stability.
The government had recently reduced the cut-off yields on treasury bills (T-bills) in an auction, signaling a higher probability of another interest rate cut. The reduction of T-bill rates by up to 41 basis points, with a total decrease of 90 basis points in January, indicated market expectations of further rate cuts.
The SBP’s decision marks the sixth consecutive interest rate cut since June 2024, when the policy rate stood at 22%.
In a statement issued after the meeting, the MPC confirmed the decision to cut the policy rate by 100 basis points to 12%, effective from January 28, 2025. The committee reiterated that inflation had been decreasing in line with expectations, driven by moderate domestic demand and supportive supply-side conditions. Although core inflation is easing, it remains elevated. The MPC also noted that the policy rate reductions since June 2024 are expected to continue supporting economic activity.
In its previous meeting on December 16, the MPC had reduced the key policy rate by 200 basis points to 13%.
— ERMD
