Pakistan central bank reduces benchmark interest rate by 100bps to 11%

The State Bank of Pakistan (SBP) on Monday reduced the benchmark interest rates by 100 basis points to 11% effective May 06, amid risk of increasing inflation rate and sticky geopolitical situation. This is the lowest rate in three years.

The decision was announced after a meeting of its Monetary Policy Committee that reviewed the economic data of the last two months, during which inflation eased off to 0.3% and the real interest rate reached to -11.7% — a historic high.

However, the State Bank of Pakistan believed that going forward, inflation rate would spike whereas economic growth would be within the range of 2.5-3.5% for the current fiscal year.

The inflation rate would be in the range of 5.5-7.5%. However, the current account would likely record a surplus mainly because of higher remittance flows.The Monetary Policy Committee (MPC) reported a sharp decline in inflation during March and April, citing lower electricity prices and decreasing food costs.

Core inflation also eased, driven by a favorable base effect and moderate demand. While the inflation outlook has improved, the MPC warned that global uncertainty—especially regarding trade tariffs—could present economic challenges.

The committee noted key developments, including provisional GDP growth of 1.7% in Q2-FY25, a current account surplus of $1.2 billion in March, and improving business and consumer sentiment.

However, tax revenue shortfalls persist, and the IMF has downgraded global growth projections for 2025-26 due to trade volatility.

The MPC maintained that the real policy rate remains positive enough to stabilize inflation within the 5-7% target range while supporting sustainable economic growth.

GDP grew 1.7% in Q2-FY25, reaching 1.5% for the first half of the fiscal year. Indicators suggest economic activity is steady, with rising auto sales and energy consumption.

However, large-scale manufacturing (LSM) remains below expectations due to contractions in certain sectors, despite strong performance in textiles, pharma, and automobiles. The FY25 growth forecast remains 2.5-3.5%.

Pakistan posted a $1.9 billion current account surplus for July-March FY25, bolstered by record-high remittances and lower oil import costs. However, the trade deficit widened to $3.4 billion in April.

The MPC expects foreign exchange reserves to reach $14 billion by June 2025 but flagged risks from global economic uncertainty.

Tax revenue grew 26.3% y/y during July-April FY25 but fell short of targets. The government increased petroleum levy rates to boost non-tax revenue. While fiscal deficit projections remain close to target, achieving the primary surplus is challenging. The MPC stressed the need for tax reforms and SOE restructuring.

Broad money (M2) grew 13.3% y/y, driven by increased private-sector credit in textiles, refineries, and chemicals. Auto financing and personal loans also rose. Inflation dropped to 0.3% y/y in April, primarily due to food and energy price reductions. The MPC expects inflation to stabilize within the 5-7% range but cautioned against risks from global supply disruptions and energy price volatility.