Pakistan's central bank cuts benchmark interest rate by 100 basis points

The State Bank of Pakistan (SBP) cut the benchmark interest rate by 100 basis points (bps) or one percentage point to 12% on Monday.

The cut, which is the sixth in a row, was in line with expectations — a survey of over a dozen brokerage houses conducted by Nukta last week revealed that all participants anticipate a 100bps cut.

With the latest cut, the policy rate is at an almost three-year low.

The SBP started the monetary easing cycle in June last year with a 150bps cut as inflation, which had reached a record high of 38% the previous year, began to ease.

Since then, it has reduced the interest rate by a cumulative 1,000 bps, including 850bps in fiscal year 2024-25.

Inflation in Pakistan is on a significant downward trend, with headline inflation projected to ease to 3.06% in January, marking the lowest level in nine years. It is expected to remain below 5% through April, driven by a favorable base effect.

However, a reversal is likely in May and June, with projections rising to 8.81% and 8.97%, respectively, as the base effect dissipates after the first quarter of 2025.

The sharp decline in inflation is attributed to several key factors, including a high base effect, stability of the Pakistani Rupee (PKR) against the U.S. Dollar (USD), and subdued prices in the food and energy sectors.