State Bank of Pakistan Cuts Rate to 12%

The State Bank of Pakistan (SBP) has announced a 100-basis-point cut in its key policy rate to 12% from 13%, in a bid to boost economic growth and align with regional benchmarks, as demanded by the Karachi Chamber of Commerce and Industry (KCCI) and the Hyderabad Chamber of Commerce and Industry (HCCI).

The decision, made by the Monetary Policy Committee (MPC), takes into account the inflation outlook and other developments, including a positive trend in remittances and favorable export numbers. SBP Governor Jameel Ahmed noted that while core inflation remains high, the MPC views a cautious monetary policy stance as necessary to ensure price stability. The current account remained in surplus in December 2024, while tax revenues remained below target, and real GDP growth turned out lower than expected.

This is the sixth consecutive rate cut since June 2024, bringing the total reduction to 1,000 basis points from an all-time high of 22%. The move is in line with expectations, as 14 out of 15 analysts surveyed by Reuters predicted a cut in the key rate. Inflation continues to trend downward, reaching 4.1% year-on-year in December, driven by moderate domestic demand and supportive supply-side dynamics. The SBP expects inflation to decrease further, but notes that core inflation remains elevated.

The KCCI and HCCI had urged the SBP to consider a 4% reduction in the policy rate, citing that the current monetary policy rate of 13% is higher than regional counterparts, deterring investment and stifling growth. The chambers argued that aligning the policy rate with regional benchmarks would benefit both the government in terms of lower debt rollover cost and businesses by reducing borrowing costs.

The rate cut is expected to revive business and economic sentiment, as Pakistan's economy showed a 0.92% growth in the first quarter of the fiscal year 2024-25. The SBP's decision to cut the key policy rate to 12% is a step towards stimulating economic growth, and the bank will continue to monitor inflation and other economic indicators to make informed decisions.