Pakistan Central Bank Cuts Key Rate by 100 bps
Pakistan’s central bank has made a notable decision to reduce its key policy rate by 100 basis points, bringing it down to 12%. This marks the sixth consecutive rate cut since June, as part of efforts to stimulate economic sentiment amid an environment of easing inflation. The bank has also projected full-year GDP growth to fall between 2.5% and 3.5%, with expectations that inflation will further decrease in January.
The State Bank of Pakistan has aggressively slashed interest rates by a total of 1,000 basis points, reducing them from an all-time high of 22% in June 2024. This decisive move represents one of the most assertive actions taken by central banks in emerging markets, surpassing the 625 basis point rate cuts implemented during the COVID-19 pandemic in 2020.
Governor Jameel Ahmad addressed the press, indicating that while inflation is anticipated to ease more in January, core inflation remains at an elevated level. For the year leading to June, the bank expects inflation to average between 5.5% and 7.5%.
The bank’s Monetary Policy Committee (MPC) commented on the decision by stating, “Considering these developments and evolving risks, the Committee viewed that a cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth.” In this context, the committee emphasized the necessity for the real policy rate to remain sufficiently positive on a forward-looking basis to stabilize inflation within the target range of 5-7%.
Analysts had anticipated this move, with 14 out of 15 surveyed predicting at least a 100 basis point reduction in the central bank’s key rate, primarily due to the decline in inflation.
The deceleration in Pakistan’s consumer inflation rate, which slowed to a 6.5-year low of 4.1% in December, was largely attributed to a high base from the previous year. This figure came in below the government’s forecast and significantly lower than the multi-decade high of approximately 40% experienced in May 2023.
In terms of economic performance, Pakistan’s economy showed a growth of 0.92% in the first quarter of the fiscal year 2024-25, which concludes in June. This data, approved by the National Accounts Committee and released by its Statistics Bureau in December, reflects modest progress.
Reaffirming their confidence in the economic prospects, the governor expressed that the central bank maintains its projected full-year GDP growth within the 2.5%-3.5% range. This aligns with their monetary policies aimed at fostering a stable economic environment, conducive to sustainable growth and development.
