KARACHI, April 29, 2025 – The State Bank of Pakistan (SBP) is widely expected to lower its benchmark policy rate by 50 basis points, bringing it down to 11.5% during its next monetary policy announcement scheduled for May 5.
This anticipated move comes as inflationary pressures ease and signs of economic stagnation persist across key sectors.
According to a research note released by Arif Habib Limited, the SBP has room to adjust the policy rate in response to Pakistan’s rapidly declining inflation. Headline inflation hit a historic low of 0.7% in March 2025 and is projected to fall further to 0.45% in April. With these developments, the real interest rate has surged to 11.3%, a level that analysts argue provides sufficient cushion for a gradual easing of the monetary policy.
The central bank last held its policy rate steady at 12% in March, citing ongoing risks from volatile energy and food prices, along with concerns about external sector stability. Despite those concerns, the SBP acknowledged a continued decline in inflation, opening the door for potential rate adjustments in future meetings.
The average headline inflation for the first 10 months of FY25 stands at 4.88%, a significant drop from 26.22% recorded in the same period last year. This trend is largely attributed to high base effects and a decline in food prices. However, core inflation (excluding food and energy) remains stubborn at 7.72% year-on-year in April, with a ten-month average of 10.05%, suggesting underlying price pressures still persist.
On the external front, the situation has shown marked improvement. Pakistan posted a current account surplus of $1.86 billion in the first nine months of FY25, compared to a $1.65 billion deficit during the same period last year. This reversal has been driven largely by a 33% rise in remittances, which reached $28 billion. However, imports also grew by 11% to $40.4 billion, indicating a possible revival in domestic demand that could pressure the exchange rate and external balances again.
Meanwhile, weak industrial output underscores the case for a policy rate cut. Large-scale manufacturing declined by 3.5% year-on-year in February and by 5.9% month-on-month. Over eight months, output contracted by 1.9%, reflecting tepid demand.
Money market trends are mixed. Longer-tenor yields have softened, with three- and five-year bonds dropping by 35 and 26 basis points respectively, hinting at expectations of lower rates. However, short-term yields have edged up, reflecting cautious sentiment.
A recent Arif Habib survey found that 54.6% of market participants expect a rate cut in the upcoming SBP policy meeting. Of them, 36.4% foresee a 100 basis point cut, while 18.2% anticipate a more modest 50 basis point reduction. The rest expect the SBP policy rate to remain unchanged.