SBP cuts policy rate by 200bps to 13% amid declining inflation and economic recovery
The State Bank of Pakistan (SBP) on Monday reduced the key policy rate by 200 basis points (bps) to 13%, marking its fifth consecutive cut as inflation continues its downward trajectory. This move brings the total reduction to 900bps since June 2024, reflecting the central bank’s strategy to balance economic growth and inflationary pressures.
SBP Governor Jameel Ahmad announced the decision following the Monetary Policy Committee (MPC) meeting. The MPC highlighted key factors driving this decision, including the sharp decline in headline inflation, which dropped to 4.9% year-on-year in November 2024. This was largely attributed to a continued decrease in food inflation and the fading impact of gas tariff hikes from November 2023.
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However, the committee noted that core inflation, standing at 9.7%, remains stubborn, and inflation expectations among businesses and consumers remain volatile. The MPC expects inflation to remain unpredictable in the short term but stabilize within the target range of 5–7% over the medium term.
The MPC underlined several positive developments since its last meeting. The current account surplus for the third consecutive month in October 2024 significantly bolstered SBP’s foreign exchange reserves, which rose to approximately $12 billion, the highest since March 2022. The surplus was aided by improved remittance inflows and a favorable global commodity price environment, which reduced domestic inflationary pressures and eased the import bill.
A Bloomberg report, quoting SBP data, highlighted that remittances from overseas Pakistanis surged 34% to $14.8 billion in the first five months of FY2024-25 compared to the same period last year. This sharp increase was attributed to the government’s crackdown on the illegal dollar market, encouraging the use of official banking channels. Finance Minister Muhammad Aurangzeb expressed optimism that remittances could reach a record $35 billion this year, up from $30 billion last year.
The government initiated a strict crackdown on illicit currency trade in September 2023, with raids by the Federal Investigation Agency (FIA) targeting hoarders and black-market dealers. The measures included the deployment of officials in plainclothes at money exchange centers, which helped curb the illicit dollar trade and stabilize the rupee.
The MPC noted an encouraging increase in credit to the private sector, reflecting improved financial conditions and banks’ compliance with the advances-to-deposit ratio (ADR) thresholds. High-frequency economic indicators also suggest improved growth prospects as the impact of cumulative policy rate cuts since June 2024 begins to unfold.
The committee emphasized that while inflation has eased significantly, risks remain, particularly regarding tax revenue shortfalls, food inflation, and global commodity price volatility. It stressed the need for “considerable efforts and additional measures” to meet annual revenue targets, a critical condition under Pakistan’s $7 billion IMF program secured in September.
Pakistan’s monetary easing stands out as one of the most aggressive among emerging markets this year. Since June, the SBP has implemented successive policy rate cuts, including 150bps in June, 100bps in July, 200bps in September, and a record 250bps in November, bringing the policy rate down from its all-time high of 22%, which remained unchanged for a year.
Analysts widely anticipated the latest 200bps cut, as inflation fell sharply to 4.9% in November, significantly below both market and government expectations. This sharp deceleration is a major reversal from the multi-decade high of 40% recorded in May 2023.
SBP Rate Cut to Boost Economy, Says FPCCI President
President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Atif Ikram Sheikh, welcomed the 200 basis points cut in the State Bank of Pakistan’s (SBP) policy rate. He emphasized that there is further scope for reducing interest rates and expressed hope for a 400 basis points cut in the next monetary policy.
Sheikh projected a 9% policy rate reduction over the next six months, stating that the move will spur economic development, enhance investment and exports, and improve currency circulation. Additionally, he noted that lower interest rates would help reduce the government’s internal debt burden.
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