Karachi, May 5, 2025 — In a move that exceeded market forecasts, the State Bank of Pakistan (SBP) announced a 100 basis point reduction in its benchmark policy rate, bringing it down to 11%, effective May 6, 2025.
This sharp rate cut, larger than the anticipated 50 basis points, signals a shift in the SBP’s monetary policy stance in response to improving inflation dynamics and easing economic pressures.
According to the SBP’s Monetary Policy Committee (MPC), the decision to slash the policy rate was supported by a substantial decline in inflation over March and April. This decrease was largely driven by falling electricity tariffs and continued moderation in food prices. The MPC also highlighted that core inflation eased to 8% year-on-year in April, a notable drop from recent months, aided by base effects and subdued demand. With inflation expectations moderating and near-term risks appearing contained, the SBP concluded that it was appropriate to recalibrate the policy rate to support economic activity without jeopardizing price stability.
Despite the rate cut, the central bank emphasized that the real interest rate remains sufficiently positive, keeping inflation anchored within the target range of 5–7%. The SBP maintained that its overall policy approach remains cautious, citing uncertainties in the global economy, including tariff tensions and volatile commodity markets, as key risks that could disrupt the domestic outlook.
Economic indicators showed mixed signals. The SBP noted provisional GDP growth of 1.7% in the second quarter of FY25, with a cumulative first-half growth of 1.5%. Encouraging trends in sectors such as textiles, automobiles, and pharma suggest growing momentum, although weaknesses persist in construction-linked industries and parts of large-scale manufacturing. Wheat production, while better than expected, still fell short of last year’s output, posing potential risks to food security and inflation.
On the external front, Pakistan recorded a strong current account surplus of $1.2 billion in March, buoyed by record-high remittances and lower import bills due to falling oil prices. The SBP’s foreign exchange reserves were bolstered by its own purchases and are projected to rise to $14 billion by June 2025, assuming expected official inflows materialize. The MPC expects this positive reserve trend to extend into FY26, supported by continued remittance inflows and a manageable current account deficit.
In terms of fiscal policy, the SBP acknowledged improved tax revenues — up 26.3% year-on-year — although collections still lag targets. While the fiscal deficit may stay near the FY25 goal, achieving a primary surplus remains challenging. The MPC urged the government to continue with structural reforms, particularly those aimed at broadening the tax base and reforming state-owned enterprises.
The SBP’s decision to lower the policy rate reflects an attempt to balance the dual objectives of supporting economic growth and ensuring inflation remains in check. As global uncertainties persist, the central bank reiterated its commitment to maintaining a prudent and flexible policy stance, ready to adjust the rate as needed in light of future developments.