KARACHI – May 5, 2025
The State Bank of Pakistan (SBP) has reduced its key policy rate by 100 basis points to 11% in a move aimed at supporting economic recovery amid slowing inflation and growing calls from trade and industry for monetary easing.
This latest cut marks the sixth consecutive reduction since June 2024, bringing the policy rate down from 22% to its current level. The central bank’s Monetary Policy Committee (MPC) cited a sharp drop in April’s inflation, which fell to just 0.3% year-on-year, driven largely by lower prices of essential food items — such as wheat, potatoes, onions, and certain pulses — as well as reduced electricity and fuel charges.
“The MPC noted that inflation in April was significantly lower than anticipated, reflecting declines in perishable food prices and energy costs,” said an SBP statement. Core inflation also eased to 8% in April, down from around 9% in previous months, thanks in part to a favorable base effect and subdued domestic demand.
Despite ongoing global uncertainties — including tariff tensions and geopolitical risks — the MPC judged that inflation expectations have moderated and the overall outlook has improved since its last review.
The committee also took note of recent economic indicators. Pakistan’s provisional GDP growth for the second quarter of FY25 stood at 1.7% year-on-year, while Q1 growth was revised upward to 1.3% from 0.9%. The current account showed a strong surplus of $1.2 billion in March, mainly due to record-high worker remittances. These inflows, along with SBP’s foreign exchange purchases, helped offset the pressure from significant debt repayments.
Improved business and consumer confidence, as indicated by recent surveys, also factored into the decision. However, the committee flagged the ongoing shortfall in tax collection and noted the global economic outlook remains fragile, with the IMF cutting growth forecasts for both advanced and emerging markets amid tariff-related uncertainties and volatile oil prices.
Despite the downtrend in inflation, the MPC acknowledged the possibility of a slight rise in the coming months, with expectations of stabilization within the target range of 5–7%. However, it warned of both upside and downside risks, including possible volatility in food prices, energy cost adjustments, and supply chain disruptions.
In light of these developments, the MPC concluded that the real interest rate remains sufficiently positive to curb inflation and support stable economic growth.
While many experts had anticipated a smaller 50bps cut or even a hold, citing rising geopolitical tensions — particularly between India and Pakistan — the larger-than-expected inflation drop strengthened the case for a more decisive rate cut. The decision follows a surprise move in March when the SBP kept the rate unchanged, disappointing many in the business community.
