Karachi, January 27, 2025 – In a significant move aimed at supporting economic recovery, the State Bank of Pakistan (SBP) announced a 100-basis-point cut in its benchmark policy rate, reducing it to 12%. This decision, effective from January 28, 2025, came during the Monetary Policy Committee’s (MPC) meeting on Monday, which assessed the country’s economic landscape and inflation trajectory.
The MPC highlighted that inflation has been on a consistent downward path, registering 4.1% year-on-year in December 2024. This decline in inflation was primarily attributed to moderate domestic demand and favorable supply-side dynamics, including a favorable base effect. The MPC indicated that inflation could continue its downward trend into January 2025, although it may slightly increase in the months ahead. Despite easing, core inflation remains elevated, posing ongoing challenges for price stability.
In addition to inflationary trends, the MPC noted that high-frequency economic indicators have shown gradual improvement in economic activity. These indicators suggest recovery in key sectors, including automobile sales, petroleum products, fertilizer, and private-sector credit disbursements. The committee believes that the cumulative reduction of 1,000 basis points in the policy rate since June 2024 would help provide further support to economic growth and recovery.
Despite these positive signs, the MPC pointed out that the real GDP growth for the first quarter of FY25 was lower than expected, registering just 0.9% compared to 2.3% in Q1-FY24. This slowdown was largely attributed to a sharp deceleration in agricultural output, coupled with moderate declines in the industrial sector. However, sectors such as textiles, food, and automobiles showed positive growth, and business confidence remained stable. The MPC projected GDP growth for FY25 to remain within the range of 2.5% to 3.5%.
Externally, Pakistan recorded a current account surplus of $0.6 billion in December 2024, contributing to a cumulative surplus of $1.2 billion in the first half of FY25. This surplus was driven by strong remittances and export earnings, particularly from high-value-added textile exports. Despite an increase in imports due to stronger economic activity, the country’s external sector remains resilient. The SBP also expects foreign exchange reserves to exceed $13 billion by June 2025, bolstered by the completion of major debt repayments.
On the fiscal front, tax revenues from the Federal Board of Revenue (FBR) rose by 26% in the first half of FY25, although they still fell short of the target. While the fiscal balance improved due to controlled expenditure and lower-than-expected interest payments, challenges remain in achieving the primary balance target for the year.
Money and credit data further support the outlook of gradual economic recovery. As of January 17, 2025, the growth rate of broad money (M2) slowed to 11.3% year-on-year, primarily due to a deceleration in net domestic assets growth. However, private-sector credit growth surged, reflecting an easing of financial conditions and improved economic confidence. While bank deposits showed a decline, currency in circulation increased modestly.
Inflationary pressures are expected to remain manageable, with headline inflation falling to 4.1% in December 2024 from 4.9% in November, driven by lower electricity tariffs, stable exchange rates, and sufficient food supplies. Although core inflation remains a concern, the MPC forecasts average inflation for FY25 to fall between 5.5% and 7.5%. However, risks remain from global commodity price volatility, potential energy tariff adjustments, and fiscal revenue measures.
Overall, the SBP’s decision to cut the policy rate reflects a cautious yet optimistic approach to managing inflation and fostering sustainable economic growth. The rate reduction aims to provide further stimulus to the economy while ensuring that inflation remains under control, supporting both economic recovery and long-term stability.