Pakistan's central bank to cut interest rates for fifth time in a row

The State Bank of Pakistan (SBP) will announce its monetary policy statement on Monday, wherein the market expects at least a 200 basis point cut in interest rates.

A survey by Nukta shows that analysts are unanimous in anticipating 200 bps cut. If it happens, it will be the fifth consecutive rate cut since June 2024, totaling a reduction of 900 basis points this year, which would be the largest aggregate and historic cut in a year.

The main reason for this expected cut is the significant drop in inflation. In November 2024, inflation fell to 4.9%, the lowest it has been in 79 months, and it is expected to remain at this level in December.

In the first four months of the fiscal year 2025, the current account balance shifted to a surplus of $349 million, compared to a deficit of $1,528 million in the same period last year.

Remittances also surged by 35% year-on-year during this period, reaching $11.9 billion, providing crucial support to the external front.

An analyst at Arif Habib Limited said the policy rate cut is expected to help reduce production costs for industries, thereby encouraging a revival of demand. High costs have hampered demand, contributing to a 0.8% decline in large-scale manufacturing growth for the first quarter of FY25.

In addition, SBP's reserves increased to $12 billion in November 2024 from $9.4 billion in June 2024. This increase was driven by the International Monetary Fund's first tranche of $1.0 billion from the 37-month Extended Fund Facility received during the outgoing five months of FY25, along with inflows from financial institutions such as the Asian Development Bank.

The analyst said boost in reserves will provide SBP with space to further ease rates without risking currency destabilization.

Pakistan's currency has appreciated by 0.14% appreciation in the fiscal year to date.