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State Bank of Pakistan Cuts Policy Rate to 12% in Boost to Economic Recovery

The State Bank of Pakistan (SBP) has announced a reduction of its key policy rate by 100 basis points, setting it at 12%, effective January 28. This move marks the continuation of the central bank’s easing cycle, following a total reduction of 1,000 basis points over the past six months, beginning in June 2024.

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The SBP’s decision comes as inflationary pressures appear to be moderating, with the inflation rate for December 2024 falling to 4.1% year-on-year. Governor Jameel Ahmed attributed this decline to a combination of easing domestic demand, stable exchange rates, and favorable base effects. However, core inflation remains elevated, prompting the SBP to adopt a cautious outlook moving forward.

“While we are seeing a positive trend in headline inflation, there are still risks at play, particularly from volatile global commodity prices and the possibility of energy tariff adjustments,” Ahmed noted in a statement following the Monetary Policy Committee’s meeting.

The central bank forecasts that inflation will average between 5.5% and 7.5% in fiscal year 2025, with short-term fluctuations expected before stabilizing.

Despite these challenges, the SBP pointed to signs of gradual improvement in economic activity. Sales of automobiles, fertilizers, and petroleum products have been on the rise, while private-sector credit has also seen an uptick. However, Pakistan’s real GDP growth for the first quarter of FY25 came in at just 0.9%, slightly below expectations, largely due to weaker agricultural performance.

On the external front, Pakistan posted a current account surplus of $600 million in December 2024, fueled by strong remittances and export growth, particularly in high-value-added textiles. Over the first half of FY25, the country’s current account surplus reached $1.2 billion. The SBP has projected the current account to remain balanced throughout FY25, with a potential surplus or deficit of up to 0.5% of GDP.

Despite this positive momentum, the SBP highlighted ongoing challenges, particularly in fiscal policy. While tax revenues grew by 26% in the first half of FY25, they still fell short of government targets, raising concerns about the government’s ability to meet its fiscal objectives. Achieving a primary balance remains a significant hurdle for Pakistan.

The central bank also remains wary of global risks, including fluctuations in oil prices and the cautious monetary policies of major global economies. As a result, the SBP has opted to maintain a positive real policy rate in the near term to support economic stability.

Looking ahead, the SBP expects foreign exchange reserves, which are currently under pressure due to debt repayments, to exceed $13 billion by June 2025, as planned inflows materialize.

This rate cut is seen as a critical step in Pakistan’s efforts to balance inflation control with economic growth, as the country navigates a complex global and domestic landscape.

Zukhruf Hussain

As an SEO Content Writer and Editor, Zukhruf Hussain deeply appreciates the impact of words and narrative building. Her passion for crafting meaningful literature has led her to explore various writing styles and niches, making her a well-versed word wizard. Outside the sphere of language, she finds joy in expressing herself through the strokes of a paintbrush.

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