The State Bank of Pakistan (SBP) is anticipated to announce a seventh consecutive reduction to the basis policy rate in its upcoming Monetary Policy Committee (MPC) meeting, though analysts predict it will remain modest and is unlikely to exceed 50 basis points.
The next meeting of the central bank’s MPC will take place on March 10. In its last meeting on Jan. 27, the MPC—for the sixth consecutive time since June 2024—had slashed the interest rate by 100 basis points to 12 percent. In its policy statement, the SBP said a cautious monetary policy stance was necessary to ensure price stability and sustainable economic growth.
The minor cut, especially as inflation has declined to 2-3%, had attracted the ire of business groups. In a statement, the Karachi Chamber of Commerce and Industry had claimed this was insufficient to address the prevailing economic challenges and unlock the country’s growth potential.
In recent weeks, several government officials, including Prime Minister Shehbaz Sharif, have vowed further cuts to the interest rate, noting this is essential to revitalize the economy. However, the central bank has maintained a cautious approach, stressing that the sharp deceleration in the inflation rate may inch back up in coming months and a modest policy is required to achieve a sustainable target of 5-7 percent inflation.
In January 2024, inflation declined to 2.4%, its lowest value in 111 months. It is expected to ease further in February to 2.2%. However, this disinflationary phase is largely base effect driven, and headline inflation is likely to increase again as the base effect fades.
According to the central bank, core inflation remains downward sticky, averaging 10.6% in the first seven months of the current fiscal year. It is expected to hover in the 8-9% range for the remainder of the fiscal year. The figures signal that underlying inflationary pressures have yet to subside completely, warranting a measured approach to further easing.
Cognizant of the possibility of the re-emergence of inflationary pressures, the central bank would likely adopt an even more cautious approach, suggesting that the end of the rate cut cycle experienced in the past year may soon come to an end.