The State Bank of Pakistan (SBP) on Monday lowered the key interest rate by 100 basis points, reducing it to 11% from the 12% designated in January.
In a statement issued after the Monetary Policy Committee (MPC), the central bank noted that inflation had declined sharply during March and April due to a reduction in administered electricity prices and ongoing declines in food inflation. It said core inflation had also declined in April, indicating a favorable base effect and moderate demand. “Overall, the MPC assessed that the inflation outlook has improved further relative to the previous assessment,” it said, while acknowledging potential challenges from heightened global uncertainty surrounding trade tariffs and geopolitical developments.
Further justifying its decision to reduce the basis rate by 1%, the MPC noted provisional real GDP growth for Q2FY25 was reported at 1.7% year-on-year, while Q1 growth was revised up to 1.3% from 0.9%. Additionally, the current account recorded a surplus of $1.2 billion in March, which coupled with foreign exchange purchases partially cushioned the impact of large ongoing debt repayments on the SBP’s FX reserves. Recent surveys, it said, had also showed further improvement in both consumer and business sentiments.
Justifying the minimal reduction, the central bank noted that shortfall in tax collection has continued to widen, while global uncertainty had led the IMF to sharply downgrade its 2025 and 2026 growth projections for both advanced and emerging economies. Factoring in all these conditions, it said the real policy rate remains adequately positive to stabilize inflation in the target range of 5-7% while ensuring sustainable economic growth.
Real sector
The MPC said cumulative growth in H1-FY25 stood at 1.5% in line with expectations, adding indicators suggested economic activity was maintaining momentum. However, it said, large-scale manufacturing remained below expectation due to “a sizable contraction” in construction, offsetting positive momentum in key segments such as garments, textiles, pharma and automobiles.
In agriculture, the MPC said wheat output had been better than targeted but still lower than last year. In light of this, it has kept the FY25 growth projection unchanged at 2.5-3.5% with an expectation of further acceleration in FY26.
External sector
The cumulative surplus of July-March FY25 stood at $1.9 billion, said the MPC, noting this was helped by a moderation in imports due to reduction in global oil prices, along with an uptick in textile exports. However, it warned, April’s trade deficit had risen to $3.4 billion. “On balance, supported by robust workers’ remittances, the MPC assessed the current account to remain in surplus during FY25,” it said, adding net financial inflows had remained weak until March due to large debt repayments. Nonetheless, it said, it expected FX reserves to rise to $14 billion by June 2025 with further build-up next year.
Fiscal sector
The MPC noted that FBR tax revenue had recorded a sizable 26.3% year-on-year growth during July-April FY25, adding this was still below target. It said the recent increase to PDL rates would further propel non-tax revenues in the remaining months of FY25. “On balance, the MPC reaffirmed its earlier assessment that while the overall fiscal deficit may remain close to the FY25 target, achieving the targeted primary surplus appears to be challenging,” it said, stressing on fiscal reforms aimed at expanding the tax net and reforming state-owned enterprises.
Inflation
The central bank said headline inflation had declined to 0.3% year-on-year in April, driven primarily by food and energy prices. A sharp decline in wheat and allied product prices, moderation in global commodity prices and downward adjustment in electricity tariffs were the major drivers of this ease in food and energy prices, it said. “Going forward, the Committee anticipates inflation to gradually inch up in the coming months and stabilize within the target range of 5-7%,” it reiterated, noting this was subject to both upside and downside risks emanating from volatility in wheat and other food prices, timing and magnitude of energy price adjustments, potential global supply-chain disruptions and uncertain commodity price outlook.