The State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) will meet on Monday (Jan. 27), with a majority of analysts predicting a further cut of 100 basis points, the sixth consecutive decline in the interest rate.
From June 2023 through June 2024, the country’s interest rate stood at 22%, a historic peak. In June 2024, the central bank reduced the interest rate by 150 basis points. The development heralded four more consecutive cuts, and 2024 ended with the interest rate at 13%. The decline of 900 basis points in less than a year is the highest such cut in any given calendar or financial year.
The rapid cuts to the interest rate were motivated by a faster-than-anticipated decrease in the inflation rate, from a peak of 38% in May 2023 to 4.1% in December 2024. Analysts expect the inflation to decline further in January 2025, leading many to expect the interest rate to hit 12% in the upcoming MPC meeting.
An additional factor facilitating a further rate cut is a current account surplus, which reached $1.2 billion in the first six months of the current fiscal year. The first six months of the last fiscal year had recorded a current account deficit of $1.39 billion. The country’s foreign exchange reserves have also stabilized at around $16 billion, despite ongoing external debt repayments, due to strong foreign inflows.
A downward trajectory of Treasury bill yields since the last monetary policy meeting also signals a further interest rate cut.
An analyst from Al-Habib Capital Market noted that a declining interest rate environment supports economic growth by reducing borrowing costs for businesses and consumers. However, they noted, GDP growth remains subdued due to weakened purchasing power.
The central bank hopes to stimulate demand through monetary easing, ensuring it aligns with the management of imports and foreign exchange reserves. This accommodative monetary policy would encourage stock market investments and potentially drive further economic activity.
Negating expectations of a larger cut in the upcoming MPC, said an analyst from Foundation Securities, was a requirement of the International Monetary Fund for the SBP to retain a significantly tight monetary policy stance at this stage.
The analyst said a primary downside risk to the interest rate and inflation projection emanates from repercussions of conflicts in and around oil producing nations and their implication on energy prices.
They also noted that the central bank had justified limiting the 200 basis points cut in the last MPC by citing sticky core inflation, a contrast to its encouraging statements on its downward trajectory in prior MPC statements. “We feel that this was driven by the notion that inflation is projected to resurge to 10% on year on year basis from May 2025-onwards as the low base effect diminishes,” they added.