In a significant move reflecting a shift in monetary policy direction, Pakistan’s Monetary Policy Committee (MPC) announced on May 5, 2025, its decision to reduce the policy rate by 100 basis points, bringing it down to 11 percent. The rate cut will take effect starting May 6, 2025. This decision comes in light of recent economic data indicating a notable decline in inflationary pressures and a relatively stable macroeconomic environment.
According to the MPC, inflation dropped sharply over March and April 2025. The fall was largely driven by a reduction in administered electricity prices and a continued decline in food inflation. Additionally, core inflation also eased in April, which the committee attributed to a favorable base effect combined with moderate domestic demand. These factors collectively contributed to an improved inflation outlook when compared to the MPC’s previous assessment.
While the easing inflation environment was a critical factor in the rate cut decision, the MPC also highlighted the importance of maintaining a measured policy stance in the face of persistent global uncertainties. The committee pointed to rising volatility in the international financial markets and ongoing geopolitical tensions, particularly those involving trade tariffs, as major areas of concern that could impact the domestic economy.
The MPC’s decision was informed by several key developments observed since its last meeting. Notably, provisional real GDP growth for the second quarter of FY25 was recorded at 1.7 percent year-on-year, while the growth figure for the first quarter was revised upward from 0.9 percent to 1.3 percent. These positive adjustments signal modest but improving economic momentum.
Another encouraging development was the current account surplus of $1.2 billion in March 2025. This surplus was supported primarily by record-high workers’ remittances, which, along with foreign exchange purchases by the State Bank of Pakistan (SBP), helped absorb the impact of substantial ongoing debt repayments. This also contributed to maintaining a stable level of foreign exchange reserves.
The MPC also cited improvements in both consumer and business confidence, as indicated by recent sentiment surveys. However, the committee expressed concern over the continued shortfall in tax collection, which could pose risks to fiscal sustainability and broader macroeconomic stability in the medium term.
On the global front, the International Monetary Fund (IMF) has significantly downgraded its growth forecasts for both advanced and emerging economies for 2025 and 2026. This revision reflects increasing uncertainty around international trade policies, which have already begun to affect financial markets and commodity prices, including a sharp drop in global oil prices.
Taking into account all these factors, the MPC concluded that the current real policy rate remains sufficiently positive to guide inflation toward the medium-term target range of 5 to 7 percent, while also supporting sustainable economic growth. The committee reiterated its commitment to a balanced approach, aiming to mitigate external risks while facilitating domestic recovery.
As global and domestic economic conditions continue to evolve, the MPC affirmed its readiness to respond appropriately to any new developments that could affect the inflation trajectory or overall economic stability.