The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has lowered the policy rate by 250 basis points to 15%, exceeding the 200-basis-point cut anticipated by analysts earlier in the day after a similar reduction in September.
“The committee observed that inflation has fallen faster than expected, now nearing its medium-term target range as of October,” the SBP stated on Monday.
In its previous meeting, the SBP reduced the policy rate by 200 basis points to 17.5%, marking the most significant rate cut since April 2020, as inflation eased and international oil prices dropped.
However, the MPC remains concerned about Pakistan’s sluggish economic growth, especially under the stringent reforms tied to the International Monetary Fund (IMF) bailout.
The committee noted that the “tight monetary policy stance” continues to be crucial in maintaining the downward inflation trend.
It highlighted factors such as a significant drop in food inflation, stable global oil prices, and the absence of anticipated increases in gas tariffs and petroleum development levies, which have accelerated disinflation recently. “Given the risks tied to these factors, the MPC expects near-term inflation to remain volatile before eventually stabilizing within the target range.”
The MPC also noted several developments that could impact Pakistan’s economic outlook, including the IMF Board’s approval of a new Extended Fund Facility (EFF) program, lower inflation expectations among consumers and businesses, declines in government securities and KIBOR yields, a shortfall in tax collection over the first four months, and rising prices of metals and agricultural goods.
In light of these conditions, the committee believes that the current monetary policy stance is “appropriate to achieve” lasting price stability within the five to seven percent inflation target range.
“This approach will also contribute to macroeconomic stability and support sustainable economic growth,” the MPC added.
The MPC projects real GDP growth for FY25 to exceed prior estimates, with a forecasted range of 2.5% to 3.5%.
On the external front, the SBP expects higher workers’ remittances and exports to keep the current account deficit within 0 to 1 percent of GDP.
“Together with planned official inflows, this is expected to boost the SBP’s foreign exchange reserves to approximately $13 billion by June 2025.”
With the Federal Board of Revenue’s (FBR) tax collections falling short during July-October, the MPC warned that achieving the FY25 tax target would require a marked acceleration in growth.
Meeting the targeted primary balance would be challenging, the MPC noted, stressing the importance of sustained fiscal consolidation to support economic stability and reiterating the need for fiscal reforms, including a broader tax base and reducing losses from public sector enterprises.
According to the SBP, private sector credit demand may rise as financial conditions ease and economic activity picks up. In the coming weeks, banks may also increase lending to meet the Advances-to-Deposit Ratio (ADR) thresholds, thereby avoiding additional tax penalties.
“The MPC anticipates average inflation for FY25 to be significantly below the previous forecast range of 11.5-13.5 percent.”
Forecasts
Market experts are optimistic about further easing. A recent survey shows that 61.1% of respondents expect a 200-basis-point rate cut, with 25% predicting a 250-basis-point cut, and 13.9% expecting a 150-basis-point cut.
Brokerage firms like Arif Habib Limited and AKD Securities have indicated a likely 200-basis-point cut, based on high real interest rates amid ongoing disinflation.
Since the last monetary policy meeting, Pakistan’s inflation rate has edged up slightly to 7.2% year-on-year in October, from 6.9% in September. Meanwhile, the country recorded a current account surplus of $119 million in September, marking the second consecutive surplus month and the largest since March 2024.
With this backdrop, market participants are closely watching the SBP’s decision, as it could significantly shape Pakistan’s economic outlook.
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