State Bank of Pakistan likely to cut interest rate for seventh time by 50bps

The State Bank of Pakistan, for the seventh consecutive time, is expected to extend its rate-cutting cycle with another 50 bps reduction in the upcoming monetary policy review.

The State Bank of Pakistan is scheduled to hold its Monetary Policy Meeting on 10 March 2025. This time, the State Bank might adopt a cautious approach and cut the rate by 50 bps, bringing the policy rate to 11.5%.

This marks the seventh consecutive cut since June 2024. The sharp deceleration in inflation has been the primary driver of rate cuts.

Inflation in January plunged to 2.4%, the lowest in 111 months, while February 2024 is projected to further ease to 2.2%.

However, this disinflationary phase is largely base effect driven, and as this effect fades, headline inflation is likely to pick up again.

Core inflation remains downward sticky, averaging 10.6% in the seven months of the current fiscal year and is expected to hover in the 8-9% range for the remainder of the fiscal year.

This signals that underlying inflationary pressures are yet to subside completely, warranting a measured approach to further easing.

While the easing trend has been fueled by a sharp decline in inflation and external sector stability, emerging concerns suggest the SBP may soon shift to a more cautious stance.

With inflationary pressures likely to re-emerge and market yields creeping up, the end of the rate cut cycle may be closer than anticipated. There are some emerging concerns in the external sector.

An analyst from Topline Securities is of the opinion that the central bank has further room for around a 100 bps cut as they expect FY26 inflation to average between 8-9%, translating into a real rate of 300-400 bps with the current policy rate of 12%.

Historically, they have maintained a real rate of 200-300 bps.

However, the Central Bank’s MPS committee will observe the status quo in the upcoming meeting owing to the following reasons:

1. The IMF review is scheduled for the first week of March wherein new revenue targets and new budgetary taxation measures will get more attention, in our view. This may affect the inflation outlook for FY26.

2. The Real Effective Exchange Rate (REER) reached 104.05 in January 2025, signaling a relatively overvalued status of PKR compared to other trading/regional peers.

Topline maintains their interest rate target of 11% for December 2025.

According to an analyst at Arif Habib Limited, the current account surplus in the seven months of the current fiscal year stood at $682 million, reversing last year’s deficit of $1.8 billion.

However, January 2025 flipped the script, with a current account deficit of $420 million after three consecutive months of surplus.

Additionally, the import bill has picked up in recent months, with the January 2025 figure surpassing the $5 billion mark. The PKR has also started showing signs of weakness, depreciating by 0.3% since mid-January 2025, now trading at 279.62/USD.

While remittances surged by 32% YoY to $20.8 billion in 7MFY25, providing a much-needed cushion, rising imports and currency depreciation could pose risks to future rate cuts.