SBP Cuts Key Policy Rate by 200bps to 13%, Marking Fifth Consecutive Reduction

The State Bank of Pakistan (SBP) has announced a reduction in the key policy rate by 200 basis points, bringing it down to 13%. This marks the fifth consecutive rate cut since June 2024 when the policy rate stood at 22%. The Monetary Policy Committee (MPC), in its statement, highlighted that the decision reflects ongoing efforts to balance inflation control with sustainable economic growth.

Headline inflation has dropped to 4.9% year-on-year in November 2024, largely due to easing food prices and the phasing out of the impact of a gas tariff hike from November 2023. Despite this progress, core inflation remains at 9.7%, with inflation expectations among consumers and businesses continuing to show volatility. The MPC emphasized that while inflation may remain unpredictable in the short term, the real policy rate remains positive, supporting the target range of 5–7% for inflation in the medium term.

Several economic trends have supported the SBP’s decision to reduce the policy rate. Pakistan’s current account posted a surplus of $349 million in October 2024, marking the third consecutive monthly surplus. Foreign exchange reserves held by the SBP also improved, increasing by $13 million during the week ending December 6, 2024, to reach $12.05 billion. This growth in reserves has occurred despite weak financial inflows and significant debt repayments. Additionally, global commodity prices have remained favorable, which has reduced domestic inflationary pressures and lowered the import bill.

Credit to the private sector has also recorded a noticeable uptick, reflecting the easing of financial conditions and efforts by banks to meet advances-to-deposit ratio (ADR) thresholds. The cumulative impact of these factors has contributed to improved growth prospects, as indicated by recent high-frequency economic activity data. The MPC noted that the effects of the cumulative policy rate cuts since June 2024 are beginning to materialize and are expected to unfold further in the coming quarters.

Market expectations had aligned with the SBP’s decision, with several analysts forecasting another reduction in the policy rate. Topline Securities and Arif Habib Limited had both predicted a 200bps cut, which matched the outcome of the MPC meeting. Newly-appointed Advisor to the Finance Minister on Economic and Financial Reforms, Khurram Schehzad, remarked that the slowing inflation rate should lead to further monetary easing, which would reduce borrowing costs for businesses and industries while easing the government’s debt servicing burden. This, he added, would help improve fiscal stability in the months ahead.

The latest cut follows a 250bps reduction in November, which exceeded market expectations at the time. Since the last MPC meeting, developments such as a marginal depreciation in the rupee, a 1.5% increase in petrol prices, and slight reductions in international oil prices have influenced economic conditions. Pakistan’s total foreign reserves now stand at $16.60 billion, with $4.55 billion held by commercial banks.

The SBP’s measured approach to monetary easing aims to maintain a balance between controlling inflation and fostering economic recovery. The decision to reduce the policy rate reflects confidence in the current economic trajectory while acknowledging the need for continued efforts to stabilize inflation and support growth. The positive effects of these adjustments are expected to further strengthen Pakistan’s economic outlook in the near future.