SBP brings policy rate down to 12pc in line with expectations of stakeholders
Business
The central bank slashes the policy rate by 100bps
KARACHI (Dunya News) – The State Bank of Pakistan (SBP) on Monday announced cut in key policy rate by 100 basis points (bps) to 12 percent from 13pc in line with expectations of the business community.
The policy rate will now be 12pc after being slashed by 1,000bps from 22pc since June 2024.
The Monetary Policy Committee (MPC) of the bank took the decision, which SBP Governor Jameel Ahmed announced at a press conference.
The SBP governor said the decision was taken with careful consideration.
"Although inflation is expected to decline next month, core inflation remains a pressing concern," he stated.
Ahmed highlighted strong remittance inflows and robust export growth as key factors supporting the current account.
He also pointed out that last week’s T-bill auction indicated market expectations of a rate cut, with yields on the 12-month tenor falling to 11.38%.
“Keeping these factors in mind, we adopted a cautious approach,” he stated, highlighting that remittance trends and export numbers were encouraging, particularly in view of the current account situation.
Read also: SBP cuts policy rate by 200bps to 13pc
Regarding foreign exchange reserves, the governor affirmed the central bank’s commitment to achieving $13 billion in FX reserves by June-end.
In a subsequent statement, the SBP noted, “Inflation continued its downward trajectory, reaching 4.1% year-on-year in December, driven by moderate domestic demand, favorable supply-side dynamics, and a positive base effect.”
The statement further projected a temporary decline in inflation in January, with a gradual uptick expected in the following months. However, core inflation remained high.
The SBP also reported a gradual improvement in economic activity, as reflected by high-frequency indicators.
Despite this, the Monetary Policy Committee (MPC) highlighted key challenges: real GDP growth fell below expectations, the current account posted a surplus in December 2024, but FX reserves dipped due to low financial inflows and high debt repayments.
Additionally, tax revenues, despite increasing in December, remained below target, and global oil prices showed heightened volatility.
Given these factors, the MPC concluded that a cautious monetary policy stance was essential to maintain price stability.
Earlier, analysts and experts expressed hope that the committee would cut the rate by 100 basis points (bps) to 12 percent as positive steps by the government had eased inflationary pressures.
In December last, the central bank slashed the policy rate by 200 basis points (bps) to 13 percent. The SBP slashed policy rate by 900bps in the past five MPC meetings.
“Headline inflation declined to 4.9 percent y/y in November 2024, in line with the MPC’s expectations. This deceleration was mainly driven by the continued decline in food inflation and the phasing out of the impact of the hike in gas tariffs in November 2023,” the SBP had announced in an official statement.
"However, the Committee noted that core inflation, at 9.7 percent, is proving to be sticky, whereas inflation expectations of consumers and businesses remain volatile. To this effect, the Committee reiterated its previous assessment that inflation may remain volatile in the near term before stabilizing in the target range.
“At the same time, the growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity. Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting economic growth on a sustainable basis,” said the committee.
