Karachi, January 27, 2025 – The State Bank of Pakistan (SBP) is poised to make a major move today during its much-anticipated Monetary Policy Committee (MPC) meeting, with market experts expecting the central bank to announce a substantial interest rate cut. Analysts are forecasting a reduction of at least 100 basis points (bps), which would bring the benchmark policy rate down from the current 13% to 12%. However, speculation is rife, with some market participants predicting an even more aggressive move, potentially slashing the rate by 200 bps to reach 11%.
A recent poll conducted by Topline Securities sheds light on the market’s expectations, showing that 61% of respondents believe the SBP will opt for a 100 bps rate cut. The poll also highlights a range of opinions, with 7% anticipating a smaller 50 bps reduction, another 7% predicting a 150 bps cut, and 17% forecasting a bold 200 bps reduction. Interestingly, 2% of respondents expect an even deeper cut of 250 bps, while 6% predict that the SBP will leave the policy rate unchanged.
Analysts point to several key factors driving expectations for a rate cut. One of the primary reasons is Pakistan’s significantly high real interest rates. As of January 2025, real interest rates stand at approximately 950 bps, well above the historical average of 200-300 bps. This comes despite the SBP’s previous actions, which included cutting rates by 900 bps over the last five meetings since June 2024. Given these high real interest rates, analysts argue that a rate cut would help ease the burden on borrowers and stimulate economic growth, particularly in light of the country’s ongoing recovery from economic challenges.
Another critical factor influencing expectations for a rate cut is the substantial decline in inflation. The inflation rate for January 2025 is projected to be just 3.5%, marking the lowest level in over 103 months. This significant drop is attributed to a combination of food price deflation and negative adjustments in electricity costs due to fuel cost adjustments (FCA). The sharp decline in inflation has provided the SBP with more room to cut interest rates while still keeping inflation under control.
If the SBP moves forward with a 100 bps rate cut, it will mark the sixth consecutive reduction in the current monetary policy cycle, bringing the total cumulative cuts to 1,000 bps. Even with this reduction, real interest rates are expected to remain at 850 bps—still considerably higher than the historical average. Analysts note that while this remains elevated, it still reflects a more balanced approach to managing inflation and stimulating growth.
Looking ahead, analysts estimate that average inflation will range between 6.5-7.5% for fiscal year 2025 (FY25) and 8.5-9.5% for fiscal year 2026 (FY26). Despite these projections, a policy rate of 12% would leave real interest rates in the range of 300-500 bps, which would still be considered relatively tight in terms of monetary policy. This suggests that even with a rate cut, the SBP will continue to maintain a cautious stance, carefully balancing its efforts to control inflation while fostering economic growth.
Today’s decision by the SBP will be pivotal in shaping the country’s economic trajectory in the coming months. A substantial rate cut would signal the central bank’s commitment to supporting growth, while the ongoing adjustments to interest rates will provide crucial signals to investors and businesses about the SBP’s approach to managing the broader economy. Ultimately, the MPC’s decision will reflect the SBP’s delicate balancing act between inflation control, economic stability, and growth.