SBP Slashes Interest Rate by 100bps, Sets Policy Rate at 12 Percent

January 27, 2025 Mahi Bukhari

The State Bank of Pakistan (SBP) has announced another reduction in the policy rate, continuing its easing cycle. Effective from January 28, 2025, the central bank reduced the rate by 100 basis points, bringing it down to 12 percent. This move marks the sixth consecutive rate cut since June 2024, reflecting an impressive total reduction of 1,000 basis points.

In this detailed analysis, we will explore the factors behind this monetary policy decision, its impact on Pakistan’s economy, and key developments highlighted in the central bank’s latest statement.

Why Did SBP Reduce the Policy Rate?

Inflation Moderation

The SBP attributed this rate cut to declining inflation trends. Year-on-year inflation for December 2024 dropped to 4.1 percent, thanks to:

Easing domestic demand.
Stable exchange rates.
A favorable base effect.

Despite this positive trend, core inflation remains elevated, leading the SBP to maintain a cautious approach in its monetary stance.

Economic Activity Improvement

Gradual economic recovery is evident in various sectors. The central bank highlighted increased activity in:

Automobile sales.
Fertilizer production.
Petroleum product sales.

Additionally, private-sector credit uptake has been rising, signaling improving investor confidence and economic stability.

Macroeconomic Indicators at a Glance

Inflation Outlook

The SBP expects average inflation for FY25 to remain between 5.5 and 7.5 percent. However, the central bank warns of short-term volatility due to potential global commodity price swings and adjustments in domestic energy tariffs.

Current Account Surplus

Pakistan recorded a current account surplus of $600 million in December 2024, bringing the first half of FY25’s surplus to $1.2 billion.
Key contributors to this surplus include:

Strong remittances.
Higher export earnings, particularly in high-value-added textiles.

The SBP forecasts the current account balance to range between a slight surplus and a 0.5 percent deficit of GDP for FY25.

Real GDP Growth

Pakistan’s real GDP growth stood at 0.9 percent for the first quarter of FY25. While growth is evident, it fell short of expectations due to weaker agricultural performance.

Challenges and Risks

Global Uncertainties

The SBP highlighted several risks, including:

Volatile global oil prices.
Tight monetary policies adopted by major economies.

These factors add pressure to the foreign exchange market and influence Pakistan’s economic stability.

Tax Revenue Concerns

Although tax revenues grew by 26 percent in the first half of FY25, they fell short of the government’s targets. Achieving the primary fiscal balance target remains challenging, raising concerns about fiscal discipline and sustainability.

Foreign Exchange Reserves and Stability

As of January 2025, foreign exchange reserves remain under pressure due to debt repayments. However, the SBP projects these reserves to exceed $13 billion by June 2025, driven by planned inflows.

The central bank emphasized maintaining a positive real policy rate to ensure macroeconomic stability and bolster foreign investor confidence.

Implications of the Rate Cut

For Businesses and Investors

Cheaper Credit: Businesses will benefit from reduced borrowing costs, encouraging expansion and investment.
Private Sector Growth: Increased private-sector credit uptake will drive economic activity.

For Consumers

Lower Loan Costs: Consumers can access more affordable financing for housing, vehicles, and personal needs.
Potential Price Stability: Lower inflation may stabilize prices of essential goods.

For the Economy

Boost in Demand: Easier monetary conditions will stimulate domestic demand.
Economic Recovery: Sectors like manufacturing and exports may experience growth, supporting overall recovery.

Monetary Policy Outlook

While the SBP’s easing cycle signals optimism, the central bank remains cautious about external and fiscal risks. Key priorities include:

Strengthening foreign exchange reserves.
Supporting private-sector growth.
Maintaining price stability despite potential global headwinds.

The SBP’s commitment to maintaining a balanced policy approach will be crucial in navigating challenges and sustaining economic momentum.

FAQs on SBP’s Interest Rate Reduction

1. Why did the SBP reduce the interest rate?

The SBP reduced the interest rate due to declining inflation, improving economic indicators, and the need to stimulate domestic demand and private-sector growth.

2. What is the current policy rate set by the SBP?

The SBP has set the policy rate at 12 percent, effective from January 28, 2025.

3. How much has the interest rate been reduced since June 2024?

The SBP has reduced the policy rate by a cumulative 1,000 basis points over six rate cuts since June 2024.

4. What is the inflation outlook for FY25?

The SBP forecasts average inflation to range between 5.5 and 7.5 percent for FY25, with short-term volatility expected.

5. How will the rate cut impact businesses?

Businesses will benefit from lower borrowing costs, increased credit availability, and improved opportunities for expansion and investment.