The State Bank of Pakistan (SBP) is expected to reduce its policy rate to 12% in the upcoming monetary policy announcement, as forecasted by analysts at Arif Habib Limited. This potential 100 basis points cut, anticipated at the Monetary Policy Committee (MPC) meeting on January 27, 2025, would bring the rate to its lowest level since March 2022, when it stood at 9.75%. The move would mark the sixth consecutive rate cut since June 2024, reflecting improving macroeconomic conditions and a reversal of earlier monetary tightening.
The sharp decline in inflation is the primary driver behind the anticipated rate reduction. In December 2024, inflation dropped to 4.1%, the lowest level in 80 months. Analysts project that inflation will fall further to 2.8% in January 2025, providing the SBP with ample room for monetary easing. This decline in price pressures is expected to support consumer purchasing power while easing borrowing costs for businesses.
Pakistan’s external sector has also shown significant improvement, bolstering the case for a policy rate cut. During the first half of FY25 (1HFY25), the current account posted a surplus of USD 1,210 million, a marked turnaround from the USD 1,397 million deficit recorded during the same period in FY24. Remittance inflows surged by 33% year-on-year, reaching USD 17.8 billion in 1HFY25, further stabilizing the economy.
Foreign exchange reserves have also strengthened considerably, rising to USD 11.7 billion in January 2025 from USD 9.4 billion in June 2024. This growth was driven by a USD 1 billion tranche from the International Monetary Fund (IMF) under its Extended Fund Facility (EFF), coupled with inflows from the Asian Development Bank (ADB) and the SBP’s open market operations. These developments have enhanced the SBP’s ability to lower interest rates without risking currency instability, as demonstrated by the modest 0.18% depreciation in the fiscal year so far.
A reduction in the policy rate is expected to bring down production costs for industries, potentially stimulating demand that has been constrained by high input costs. This move is particularly critical for large-scale manufacturing (LSM), which saw a 1.3% year-on-year decline during the first five months of FY25. By lowering borrowing costs, the SBP aims to encourage industrial activity and support economic growth.
The upcoming monetary policy decision is poised to set the tone for 2025 and reflects the SBP’s confidence in the country’s improving economic fundamentals. As Pakistan continues its recovery, a reduced policy rate could serve as a catalyst for industrial growth, enhanced consumer spending, and broader economic revitalization. The decision underscores the central bank’s strategy to balance growth with financial stability, leveraging recent gains in inflation control and external account performance to support long-term economic progress.