In line with expectations: SBP reduces key interest rate by 100bps, takes it to 12%

In line with expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has reduced the key policy rate by 100 basis points, taking it down to 12 percent.

This is the sixth successive cut in the key interest rate since June 2024 when it stood at 22%.

“At its meeting today, the MPC decided to cut the policy rate by 100 bps to 12 percent, effective from January 28, 2025,” the MPC said in a statement.

“The Committee noted that inflation continued to trend downward in line with expectations, reaching 4.1 percent y/y in December. This trend is driven by moderate domestic demand conditions and supportive supply-side dynamics, amidst favorable base effect.

“Inflation is expected to come down further in January before inching up in the subsequent months. The Committee also noted that core inflation, while continuing to ease, is still at an elevated level.

“At the same time, high frequency indicators continued to show gradual improvement in economic activity. The MPC assessed that the impact of the significant reduction by 1,000 bps in the policy rate since June 2024 will continue to unfold and further support economic activity.”

In its previous meeting held on December 16, the MPC reduced the key policy rate by 200bps to 13%.

The MPC also noted the key developments since its last meeting.

“First, real GDP growth in Q1-FY25 turned out slightly lower than the MPC’s earlier expectations. Second, the current account remained in surplus in December 2024, though the SBP’s FX reserves declined amidst low financial inflows and high debt repayments. Third, despite a substantial increase in December, tax revenues remained below target in H1-FY25. Fourth, global oil prices have exhibited heightened volatility over the past few weeks. And lastly, the global economic policy environment has become more uncertain, prompting central banks to adopt a cautious approach.

“Considering these developments and evolving risks, the MPC viewed that a cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth. In this regard, the MPC assessed that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5-7 percent.”

Inflationary expectations

The MPC said that the declining trend in inflation is mainly led by the downward adjustment in electricity tariffs; adequate supply of key food items leading to low level of food inflation; stability in exchange rate; and favorable base effect.

“Underlying inflationary pressures – as indicated by core inflation – also moderated amidst contained domestic demand, though these remain elevated. Moreover, inflation expectations also remained volatile. Based on these trends, the MPC reiterated its earlier assessment that the near-term inflation will remain volatile and is expected to increase close to the upper bound of the target range towards the end of FY25.

“On balance, the MPC expects headline inflation for FY25 to average between 5.5-7.5 percent.

“Going forward, inflation outlook is subject to risks emanating from volatile global commodity prices, protectionist policies in major economies, timing and magnitude of administered energy tariff adjustments, volatile perishable food prices, as well as any additional measures to meet the revenue target.”

Market expectations

Most market experts had expected the central bank to continue with its monetary easing stance as a declining inflation rate fuelled expectations of a sixth-consecutive cut.

Brokerage house JS Global projected a policy rate cut of at least 100bps.

In its survey, JS Global said 79% of the participants expected the central bank to announce a minimum rate cut of 100bps.

Arif Habib Limited (AHL), another brokerage house, also anticipated a cut of 100bps.

Citing its survey, AHL said 68.4% of participants expected a 100bps rate cut, 15.8% predicted an interest rate decline of 200bps, and 10.5% anticipated a 150bps cut. Only 5.3% of participants saw no change in policy rate.

Similarly, in its survey, the CFA Society found the majority, 75%, expected a reduction of 100bps. Additionally, 13% predicted a 150bps cut, while 9% saw a reduction of 200bps.

Previous MPC meeting

At its previous meeting, the MPC cut the key interest rate by 200bps, in line with market expectations.

The MPC at the time observed that “growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity. Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting economic growth on a sustainable basis.”

Since the last MPC meeting, several key economic developments took place.

The rupee depreciated by 0.2%, while petrol prices increased by 1.6%.

Internationally, oil prices rose since the last MPC, hovering above $79 per barrel amid heightened uncertainty.

Pakistan’s headline inflation clocked in at 4.1% on a year-on-year basis in December 2024, lower than the reading in November 2024 when it stood at 4.9%.

In addition, the country’s current account posted a surplus of $582 million in December 2024, a significant increase of 109% when compared with the surplus of $279 million in the same month of the previous year. This was the fifth consecutive month of a current account surplus.

Foreign exchange reserves held by the SBP decreased by $276 million on a weekly basis, clocking in at $11.45 billion as of January 17, data released on Thursday showed.

The country’s total liquid foreign reserves were $16.19 billion, and its net foreign reserves held by commercial banks were $4.74 billion.