Karachi, January 20, 2025 – The State Bank of Pakistan (SBP) has confirmed that it will unveil the first Monetary Policy Announcement of 2025 on January 27.
This announcement will come after the Monetary Policy Committee (MPC) meeting, which is scheduled to take place on the same day. Following the meeting, SBP Governor Jameel Ahmad will hold a press conference to announce the committee’s decision on the policy rate.
The upcoming policy decision is highly anticipated, with market participants eagerly awaiting insights into the SBP’s stance amidst a rapidly changing economic environment. A recent survey conducted by Topline Securities Limited has revealed that most market analysts expect the SBP to announce a 100 basis points (bps) reduction in the benchmark policy rate during this meeting. The survey shows that 61% of respondents predict a 100bps cut, with others expecting a range of potential adjustments: 7% foresee a 50bps reduction, 7% anticipate a 150bps cut, 17% are projecting a 200bps cut, 2% expect a 250bps reduction, and 6% believe there will be no change in the policy rate.
The anticipation for this rate reduction stems from the exceptionally high real interest rates in Pakistan, which stand at approximately 950bps in January 2025. These rates are significantly above the historical average of 200-300bps. Despite the SBP’s efforts to address this by implementing a cumulative 900bps reduction in the policy rate since June 2024, real interest rates have remained high. Analysts suggest that the current high real interest rates are partly due to a substantial decline in inflation, which is projected to reach 3.5% in January 2025 – the lowest level in 103 months. This sharp drop in inflation is largely attributed to a decrease in food prices and negative adjustments in electricity tariffs under the Fuel Cost Adjustment (FCA) mechanism.
Given these factors, analysts believe that the SBP is likely to proceed with a 100bps rate cut, marking the sixth consecutive reduction in this cycle and bringing the total reduction to 1000bps. Even with this cut, real interest rates would still remain elevated at 850bps, well above Pakistan’s historical average, ensuring a cushion against potential external or fiscal shocks, including the impacts of gas price hikes, fuel price adjustments, and the effects of a potential mini-budget.
Furthermore, the SBP Governor has recently suggested that the average inflation rate for the fiscal year 2025 (FY25) is expected to be lower than the previously forecasted range of 11.5-13.5%. Updated projections will be shared in the January 2025 MPC meeting. Analysts predict inflation will average between 6.5-7.5% in FY25 and 8.5-9.5% in FY26.
The survey also indicates that 56% of respondents expect inflation to remain below 8% for FY25, slightly down from 59% in a previous estimate. Additionally, 94% of respondents forecast interest rates will fall below 12% by December 2025, with 82% predicting rates between 10-12% by mid-2025. The SBP’s proactive policy adjustments have contributed to declines in the 6-month KIBOR and Treasury bill rates, which have decreased by 23-32bps since the last MPC meeting in December 2024.