SBP Monetary Policy: Rate Cut to 11% Amidst Declining Inflation
The rate cut is seen as a positive move to support the economy, with the business community demanding further reductions to stimulate industrial activity and drive sustainable economic growth. The SBP's decision is expected to have a positive impact on the economy, and the country's foreign exchange reserves are expected to rise to $14 billion by June 2025.
The State Bank of Pakistan (SBP) has lowered its benchmark interest rate by 100 basis points to 11%, effective from May 6, 2025, in response to declining inflation driven by reduced electricity tariffs and easing food prices.
The decision, announced after the Monetary Policy Committee (MPC) meeting, reflects a decline in inflation, with the country's inflation rate standing at 0.3% YoY in April, significantly lower than March's 0.7%. Core inflation also fell in April, aided by a favourable base and moderate demand. The MPC acknowledged ongoing global risks and stressed the need for a balanced monetary stance.
The rate cut is expected to stimulate economic activities, with the business community demanding a significant reduction to revive the economy. The United Business Group leader has called for a major cut to bring down the policy rate to 8% and electricity tariff to Rs26 per unit. The Rawalpindi Chamber of Commerce and Industry has also urged the SBP to cut its policy rate to single digits to stimulate industrial activity and drive sustainable economic growth.
Despite a long-term decline in inflation and real interest rates above 11%, analysts had expected a 50bps reduction or a hold due to global uncertainties. However, the SBP's decision to cut the rate by 100 basis points is seen as a positive move to support the economy. The country's current account posted a $1.2 billion surplus in March, and SBP's forex reserves slightly increased to $10.21 billion as of April 25.
The SBP's Monetary Policy Committee will continue to monitor the economic situation and adjust the policy rate accordingly. The committee emphasized maintaining a cautious stance, also expressing optimism about rising foreign exchange reserves to $14 billion by June 2025. The rate cut is expected to have a positive impact on the economy, and the business community is hopeful that it will lead to increased economic activities and growth.