In response to calls for a significant rate decrease, the State Bank of Pakistan (SBP) declared on Monday that it had chosen to lower its key policy rate by 100 basis points (bps), from 13 percent to 12 percent.
After being cut by 1,000 basis points from 22 percent since June 2024 in six consecutive periods, the central bank’s policy rate is currently 12 percent.
SBP Governor Jameel Ahmed said at a press conference that the Monetary Policy Committee (MPC) has decided to lower interest rates during its meeting today, taking into account the inflation outlook and other factors.
The head of the central bank also reported that remittances were on the rise. He also pointed out that January inflation figures will undoubtedly decline, but he cautioned that core inflation would still be high.
“With these considerations in mind, we took a cautious approach,” he stated, adding that the remittance trend and export figures were both “good,” while keeping the current account in mind.
The governor stated that the central bank remained optimistic about reaching its target of $13 billion in foreign exchange (FX) reserves by the end of June.
“The committee noted that inflation continued to trend downward in line with expectations, reaching 4.1pc y/y [year-on-year] in December,” the SBP stated in a statement later released.
The statement emphasized that inflation was “expected to come down further in January before inching up in the subsequent months,” and that the trend was “driven by moderate domestic demand conditions and supportive supply-side dynamics, amidst favorable base effect.”
The committee also emphasized that core inflation was still high.
“High frequency indicators continued to show gradual improvement in economic activity at the same time,” the statement said.
The MPC noted in its major developments that the real GDP growth was less than what the committee had anticipated.
“Second, despite low financial inflows and high debt repayments, the current account remained in surplus in December 2024,” the statement stated.
Thirdly, it stated that “tax revenues remained below target despite a substantial increase in December.”
Fourth, it pointed out that throughout the last several weeks, there has been increased volatility in the price of oil globally.
The committee “viewed that a cautious monetary policy stance is needed to ensure price stability” in light of these developments and changing risks.
At last week’s auction, the government decreased the cut-off yields on Treasury bills (T-bills), indicating a greater likelihood of an additional interest rate.
As the government increased the amount within the auction target, T-bill rates were lowered by as much as 41 basis points. This month, the return on a 12-month tenor was reduced by 41 basis points to 11.38 percent, down from 49 basis points at the auction on January 8.
The majority of analysts and financial professionals had anticipated that the SBP would lower interest rates by 100 basis points during today’s MPC meeting.
