Analysts at Arif Habib Limited predict that the State Bank of Pakistan (SBP) is likely to further reduce the policy rate to 12% in the upcoming monetary policy announcement.
According to a research report, the analysts foresee a 100 basis points rate cut in the Monetary Policy Committee (MPC) meeting scheduled for January 27, 2025, marking the first policy decision of the calendar year. If realized, this would bring the policy rate down to a level last observed in March 2022, when it stood at 9.75%.
The analysts said that the potential cut would represent the sixth consecutive reduction in the policy rate since the central bank initiated its interest rate reversal in June 2024. This series of rate cuts underscores the country’s improving macroeconomic landscape, according to the analysts.
Key Macroeconomic Indicators Supporting the Anticipated Rate Cut
The primary factor driving expectations of a rate cut is the significant decline in inflation, which eased to 4.1% in December 2024—the lowest level in 80 months. Analysts further project inflation to decline to 2.8% in January 2025, providing additional room for monetary easing.
Moreover, Pakistan’s external sector has shown marked improvement. During the first half of FY25 (1HFY25), the current account surplus reached USD 1,210 million, reversing a deficit of USD 1,397 million recorded during the same period in the previous year. Remittances also surged by 33% year-on-year in 1HFY25, totaling USD 17.8 billion and offering crucial support to the economy.
The SBP’s foreign exchange reserves have also strengthened, rising to USD 11.7 billion in January 2025, compared to USD 9.4 billion in June 2024. This increase was driven by the receipt of the first USD 1 billion tranche from the IMF’s 37-month Extended Fund Facility (EFF), along with inflows from institutions like the Asian Development Bank (ADB) and SBP’s open market operations. These developments bolster the SBP’s ability to lower interest rates without triggering significant currency instability, as evidenced by the modest 0.18% depreciation in the fiscal year to date.
A reduction in the policy rate is expected to lower production costs for industries, stimulating demand that has been constrained by high costs. This could also help address the 1.3% year-on-year decline in large-scale manufacturing (LSM) growth observed during the first five months of FY25 (5MFY25).