Central Bank slashes main interest rate by one percent, now stands at 11%
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Pakistan's Monetary Policy Committee Slashes Policy Rate
The Monetary Policy Committee (MPC) of Pakistan's central bank, the State Bank of Pakistan (SBP), has made a surprise move by reducing the policy rate by 100 basis points (bps) to 11%.
"At its meeting today, the MPC decided to cut the policy rate by 100 bps to 11%, effective from May 6, 2025," the MPC said in a statement on Monday.
This rate cuts are more than market forecasts and marks the lowest policy rate since March 2022 (9.75%). The central bank has decreased the rate by 1,100bps since June after an all-time high of 22%.
According to the SBP, inflation has dropped dramatically in recent months, primarily due to a decrease in administered electricity prices and a continued downtrend in food inflation. Moreover, core inflation also fell in April, reflecting favorable base effects amidst moderate demand conditions. As a result, the MPC believes the inflation outlook has improved.
Inflation Outlook
Headline inflation dipped to 0.3% year-over-year (y/y) in April, fueled primarily by food and energy prices. Luxury goods experienced a modest price increase due to higher demand.
Core inflation, after staying stable around 9% for the previous few months, fell to 8% y/y in April. The MPC anticipates inflation to gradually increase in the coming months and find equilibrium within the target range of 5-7%.
However, this outlook is subject to both upside and downside risks emanating from volatility in wheat and other food prices, potential global supply chain disruptions, and uncertain commodity price outlook.
Economic Developments in Pakistan
The MPC acknowledged several key developments since its last meeting. Chief among them is the country's real Gross Domestic Product (GDP) growth. The provisional GDP growth for Q2 was reported at 1.7% y/y, while Q1 growth was revised up to 1.3% from 0.9%.
The current account posted a sizable surplus of $1.2 billion in March, mostly due to record-high workers' remittances. Moreover, surveys suggest a further improvement in both consumer and business sentiments. However, the shortfall in tax collection continues to widen.
Recent global uncertainty has led the International Monetary Fund (IMF) to sharply downgrade its growth projections for both advanced and emerging economics for 2025 and 2026. This tariff uncertainty has also triggered heightened financial market volatility and a sharp decline in global oil prices.
Global Economic Context
Currently, the economic environment worldwide remains unstable due to ongoing trade tensions, geopolitical events, and the COVID-19 pandemic. The projected growth for the global economy is expected to slow down, with advanced economies and emerging markets expected to expand at a modest pace.
According to the World Bank, Pakistan's gross domestic product (GDP) growth is projected to moderate slightly from 2.7% in FY2024 to 2.6% in FY2025. The International Monetary Fund (IMF) estimates a similar GDP growth rate of 2.6% for FY2025 and FY2026.
Implications for Monetary Policy
Considering the evolving economic conditions, the MPC stated that the real policy rate remains adequately positive to stabilize inflation in the target range of 5-7%, while maintaining the economy's sustainable growth trajectory.
However, market experts are divided over the bank's upcoming move. Despite the MPC's rate cut, some analysts believe the central bank might observe a status quo, considering the IMF review, US tariffs risks, and insufficient foreign inflows for the second half of the fiscal year.
Wrap Up:
Pakistan's economic outlook shows gradual stabilization but faces significant challenges from structural issues and external pressures. Robust reforms are crucial to ensure long-term inclusive growth and economic stability. The MPC's rate cut reflects the improving economic environment but poses challenges in maintaining financial stability and ensuring sustainable growth.
- The MPC's decision to lower the policy rate could boost businesses' interest in investing due to the reduced borrowing costs, potentially stimulating the growth of Pakistan's economy.
- However, the increased volatility in global finance, particularly in the decentralized finance (DeFi) sector, poses a risk to the stability of Pakistan's economy, as any negative shocks could lead to a rise in debt and inflation.
- Despite the lowered policy rate, the risk of debt accumulation remains a concern, particularly as inflationary pressures can strain public finances and challenge the MPC's goal of maintaining economic growth and stability.
- As inflation continues to decrease, there is a chance for businesses to expect a more stable economic climate, reducing the overall risk and encouraging long-term growth strategies.
- The ongoing global economic instability, fueled by trade tensions, geopolitical events, and the COVID-19 pandemic, makes it crucial for Pakistan to consider the potential impact on its economy, particularly in terms of managing debt levels and ensuring financial stability while pursuing growth.
