The State Bank of Pakistan (SBP) has reduced its benchmark policy rate by 100 basis points, bringing it down to 11%, effective from May 6, 2025. The decision was announced after a meeting of the central bank’s Monetary Policy Committee (MPC) on Monday and marks a sharper-than-expected easing move, aimed at supporting economic recovery amid easing inflationary pressures.
The MPC highlighted a notable decline in inflation during March and April, with headline inflation dropping to just 0.3% year-on-year in April. The sharp decrease was largely driven by falling administered electricity tariffs, declining food prices, and a global downtrend in commodities. Core inflation, which had been sticky around 9% for several months, also showed a decline to 8% in April.
In its policy statement, the MPC acknowledged that while inflation has eased considerably and expectations have moderated, certain external and domestic challenges continue to cloud the outlook. The committee noted that global uncertainty, particularly related to trade tariffs and geopolitical tensions, could still impact economic performance and price stability in the months ahead.
According to Mohammed Sohail, CEO of Topline Securities, the decision to reduce the rate by a full percentage point came as a surprise to many in the market who had expected a more modest cut. In fact, analysts at Arif Habib Limited had anticipated only a 50 basis points cut, taking the rate to 11.5%. Meanwhile, other market participants expected the SBP to hold the rate at 12% due to concerns about the International Monetary Fund (IMF) review process and potential risks stemming from global trade disruptions.
In addition to favorable inflation trends, the central bank also cited key macroeconomic indicators that contributed to its decision. Pakistan’s provisional real GDP growth for the second quarter of FY25 stood at 1.7% year-on-year, while the first quarter figure was revised upward to 1.3% from a previous estimate of 0.9%. Moreover, the country posted a current account surplus of $1.2 billion in March 2025, mainly fueled by record-high remittances from overseas Pakistanis.
On the fiscal side, the MPC acknowledged ongoing concerns, such as the widening shortfall in tax collection. However, the committee expressed optimism due to improved consumer and business sentiment, as reflected in recent surveys. The rupee, while slightly depreciated by 0.4%, remains relatively stable, and global oil prices have continued to decline, easing import-related pressures.
Looking forward, the SBP expects inflation to gradually rise in the coming months before stabilizing within the 5–7% target range. However, this projection remains subject to volatility in food prices, the timing of energy price revisions, and global commodity market trends.
The central bank emphasized that despite the rate cut, the real policy rate remains positive and adequately positioned to support both price stability and sustainable economic growth. The SBP also reiterated the importance of maintaining a cautious and measured policy stance to mitigate future risks.
This rate cut follows the previous MPC meeting where the policy rate was kept unchanged at 12%. Since then, a series of developments including falling inflation, a sizable current account surplus, and easing oil prices have shaped the central bank’s latest decision.
As Pakistan continues its efforts toward macroeconomic stability and structural reform, including its engagement with the IMF, the trajectory of interest rates will likely remain dependent on both domestic economic indicators and the evolving global financial landscape.