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The State Bank of Pakistan (SBP) has lowered the policy rate by 100 basis points, bringing it down to 11 percent, effective May 6, 2025.
This decision, taken by the Monetary Policy Committee (MPC) in its latest meeting, reflects a growing confidence in Pakistan’s disinflationary trajectory.
This marks the sixth rate cut since June 2024, when the benchmark interest rate stood at a staggering 22 percent. The new rate represents a significant 1,000bps reduction over the past year.
Why the Cut?
According to the SBP, April saw an unexpectedly low inflation rate of just 0.3 percent year-on-year, largely driven by falling prices of essential food items such as wheat, onions, and pulses. Electricity and fuel charges also saw reductions, easing cost pressures on households and businesses alike.
“Inflation in April turned out to be lower than expected,” the SBP noted, citing sharp declines in perishable food prices and energy costs.
These components, with heavy weight in the CPI basket, helped bring down headline inflation to multi-year lows.
Core Inflation and Outlook Remain Positive
Core inflation is a key metric that strips out volatile food and energy prices. It also declined to 8.0 percent in April, down from around 9 percent in recent months. The SBP attributed this to a favorable base effect and stable demand conditions.
Looking ahead, the central bank expects inflation to gradually inch up in the coming months but remain within its target range of 5–7 percent, barring shocks from global supply disruptions or domestic food price volatility.
GDP Growth and External Position
Pakistan’s economic recovery appears to be gaining ground. Real GDP growth was provisionally reported at 1.7 percent for Q2-FY25, with the first half of the fiscal year showing cumulative growth of 1.5 percent. The uptick was supported by stronger sales in automobiles, petroleum products (excluding furnace oil), and higher electricity generation.
Meanwhile, the current account posted a $1.2 billion surplus in March, bringing the cumulative surplus for July–March FY25 to $1.9 billion. Record-high workers’ remittances and a reduced oil import bill primarily drove this.
However, the trade deficit in April widened to $3.4 billion, indicating some external risks persist.
On the fiscal side, FBR tax revenues grew by 26.3 percent year-on-year during July–April FY25, although still trailing targets. To offset this, the government has increased petroleum levy rates to boost non-tax revenues.
On the credit front, private sector borrowing rose 12.6 percent, with increased activity in sectors like textiles, refineries, chemicals, and fertilizers. Auto loans and personal financing also registered gains, reflecting improved market confidence.
Risks and Uncertainty Remain
Despite the improved macroeconomic outlook, the MPC expressed caution due to “heightened global uncertainty,” including volatile commodity prices, geopolitical tensions, and trade tariff risks. These factors could impact Pakistan’s economic performance and inflation dynamics in the months ahead.
