The State Bank of Pakistan (SBP) has announced a 100 basis point cut in its benchmark interest rate, reducing it to 11%, effective May 6, 2025. The decision follows a meeting of the Monetary Policy Committee (MPC) and marks the first rate cut since the central bank held rates steady in March.
According to the SBP, the move is driven by a sharp decline in inflation over March and April, supported by reduced electricity tariffs and falling food prices. Core inflation also eased to 8.0% year-on-year in April, reflecting moderate demand and favorable base effects.
Key Economic Developments
The MPC considered several economic indicators:
GDP Growth: Q2-FY25 provisional GDP growth was 1.7%, bringing H1-FY25 growth to 1.5%, consistent with the MPC’s expectations.
Current Account: A strong $1.2 billion surplus in March, led by record remittances, brought the July-March FY25 total to $1.9 billion.
Business Confidence: Surveys show improving consumer and business sentiment.
Fiscal Concerns: While FBR revenue grew 26.3% year-on-year in July-April FY25, it still missed targets, and achieving a primary surplus remains challenging.
The MPC expects the SBP’s foreign exchange reserves to reach $14 billion by June 2025, buoyed by planned official inflows and a manageable current account.
Real Sector Outlook
While agriculture and key industrial sectors like garments and autos show signs of recovery, large-scale manufacturing (LSM) remains under pressure, especially in construction-allied segments. Wheat production, although better than target, is lower than last year. The SBP maintains its FY25 growth projection at 2.5 – 3.5%, with stronger growth anticipated in FY26—barring risks from global volatility or unfavorable weather.
Inflation and Monetary Conditions
Headline inflation dropped to just 0.3% year-on-year in April, mainly due to easing food and energy costs. The MPC anticipates inflation will gradually rise in the coming months but remain within the target range of 5 – 7%, assuming stability in food and energy prices.
Credit to the private sector grew by 12.6%, especially in textiles, chemicals, and fertilizers, reflecting improving financial conditions. However, money supply growth (M2) also rose to 13.3% as of April 18, partly due to seasonal currency circulation increases during Eid.
Risks and Forward Guidance
Despite positive trends, the MPC highlighted risks from:
Geopolitical tensions
Volatile global trade tariffs
Uncertain commodity prices
Unpredictable weather affecting agriculture
The MPC reaffirmed the need for fiscal reforms, including better agriculture income tax collection, expansion of the tax base, and SOE restructuring, to support long-term macroeconomic stability.
