The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday cut the policy rate by 100 basis points (bps) to 11%.
“At its meeting today, the Monetary Policy Committee (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 cut is higher than market expectations,” said Mohammed Sohail, CEO Topline Securities.
This is the lowest policy rate since March 2022 (9.75%). The central bank has cut the rate by 1,100bps since June from an all-time high of 22%.
In its statement, the MPC noted that inflation declined sharply during March and April, mainly due to a reduction in administered electricity prices and a continued downtrend in food inflation.
“Core inflation also declined in April, primarily reflecting favourable base effects amidst moderate demand conditions.
“Overall, the MPC assessed that the inflation outlook has improved further relative to the previous assessment.
“At the same time, the Committee viewed that the heightened global uncertainty surrounding trade tariffs and geopolitical developments could pose challenges for the economy. In this backdrop, the MPC emphasized the importance of maintaining a measured monetary policy stance,” read the statement.
Inflation Outlook
SBP noted that the headline inflation fell to 0.3% y/y in April, driven primarily by food and energy prices.
“A sharp decline in wheat and allied product prices, moderation in global commodity prices and downward adjustment in electricity tariffs were the major drivers of this ease in food and energy prices.
“These factors also contributed to the moderation in inflation expectations of consumers,” it said.
SBP observed that core inflation, after remaining sticky at around 9% over the past few months, declined to 8% y/y in April.
“Going forward, the Committee anticipates inflation to gradually inch up in the coming months and stabilise within the target range of 5–7%.
“This outlook is, however, subject to both upside and downside risks emanating from volatility in wheat and other food prices, timing and magnitude of energy price adjustments, potential global supply-chain disruptions and uncertain commodity price outlook.”
Key economic developments
While reaching the decision, the MPC noted the following key developments since its last meeting.
“First, provisional real GDP growth for Q2-FY25 was reported at 1.7% y/y, whereas Q1 growth was revised up to 1.3% from 0.9%.
“Second, the current account recorded a sizable surplus of $1.2 billion in March, mainly due to record-high workers’ remittances. This surplus and SBP’s FX purchases partially cushioned the impact of large ongoing debt repayments on the SBP’s FX reserves.
“Third, recent surveys suggest further improvement in both consumer and business sentiments.
“Fourth, a shortfall in tax collection has continued to widen.
“Lastly, global uncertainty, particularly around tariffs, has led the IMF to sharply downgrade its 2025 and 2026 growth projections for both advanced and emerging economies. The tariff uncertainty has also triggered heightened financial market volatility and a sharp decline in global oil prices,” it noted.
The central bank’s committee said that considering the evolving developments and risks, the real policy rate remains adequately positive to stabilise inflation in the target range of 5–7%, while ensuring that the economy grows on a sustainable basis.
Market expectations
Market experts remain split over the central bank’s upcoming move.
Arif Habib Limited (AHL), a brokerage house, said the State Bank of Pakistan (SBP) was expected to cut the key policy rate by 50 basis points (bps) to take it to 11.5%.
AHL, in its report, stated that given the sustained disinflationary trend and ample real interest rate cushion, there was still room for a measured rate cut to support economic recovery without undermining macroeconomic stability.
On the other hand, analysts at Topline Securities believed that the central bank’s MPC would observe a status quo, citing several factors, including the International Monetary Fund (IMF) review and the US tariffs risk.
“The expected foreign inflows for 2HFY25 have not materialised yet and are expected to be received once the first review of the IMF is approved by the Board (before Jun 2025),” the report noted.
“Furthermore, the IMF has also mentioned in its press release of staff-level agreement that Pakistan remains committed to maintaining a sufficiently tight monetary policy to keep inflation low.
“The US tariff risks are still looming, and we expect the central bank to maintain the status quo till any clarity on this global development.”
Similarly, a Reuters poll found that the SBP is set to hold its key interest rate at 12% due to geopolitical tension and the inflation outlook.
For now, the bank will likely maintain a wait-and-see approach due to a fluid trade picture, persistent core inflation and an upcoming International Monetary Fund review, said S&P Global Market Intelligence senior economist Ahmad Mobeen.
Previous MPC meeting
At its last meeting, the MPC of the central bank maintained the policy rate unchanged at 12%, contrary to market expectations.
The committee back then noted that economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators.
“Moreover, the MPC viewed that some pressures on the external account have emerged due to rising imports amidst weak financial inflows.
“On balance, the MPC assessed the current real interest rate to be adequately positive on the forward-looking basis to sustain the ongoing macroeconomic stability.”
Since the last MPC meeting, several key economic developments have occurred.
The rupee has depreciated by 0.4%, while petrol prices decreased by 1.2%.
Internationally, oil prices have declined since the last MPC, hovering around $61 per barrel amid improved supply.
Pakistan’s headline inflation clocked in at 0.3% on a year-on-year basis in April 2025, a reading below that of March 2025, when it stood at 0.7%, showed Pakistan Bureau of Statistics (PBS) data.
In addition, Pakistan’s current account (C/A) posted a significant surplus of $1.2 billion in March 2025, against a deficit of $97 million last month. On a year-on-year (YoY) basis, the C/A increased 230% against a surplus of $363 million recorded in the same month last year.
Foreign exchange reserves held by the SBP edged higher by $9 million on a weekly basis, clocking in at $10.21 billion as of April 25.
Total liquid foreign reserves held by the country stood at $15.25 billion. Net foreign reserves held by commercial banks stood at $5.04 billion.
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