In line with expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has reduced the key policy rate by 100 basis points, taking it down to 12%.
This is the sixth successive cut in the key interest rate since June 2024 when it stood at 22%.
In its previous meeting held on December 16, the MPC reduced the key policy rate by 200bps to 13%.
Market expectations
Most market experts had expected the central bank to continue with its monetary easing stance as a declining inflation rate has fuelled expectations of a sixth-consecutive cut.
Brokerage house JS Global projected a policy rate cut of at least 100bps.
In its survey, JS Global said 79% of the participants expected the central bank to announce a minimum rate cut of 100bps.
Arif Habib Limited (AHL), another brokerage house, also anticipated a cut of 100bps.
Citing its survey, AHL said 68.4% of participants expected a 100bps rate cut, 15.8% predicted an interest rate decline of 200bps, and 10.5% anticipated a 150bps cut. Only 5.3% of participants saw no change in policy rate.
Similarly, in its survey, the CFA Society found the majority, 75%, expected a reduction of 100bps. Additionally, 13% predicted a 150bps cut, while 9% saw a reduction of 200bps.
Previous MPC meeting
At its last meeting, the MPC cut the key interest rate by 200bps, in line with market expectations.
The MPC at the time observed that “growth prospects have somewhat improved, as reflected by the recent uptick in high-frequency indicators of economic activity. Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting economic growth on a sustainable basis.”
Since the last MPC meeting, several key economic developments took place.
The rupee depreciated by 0.2%, while petrol prices increased by 1.6%.
Internationally, oil prices rose since the last MPC, hovering above $79 per barrel amid heightened uncertainty.
Pakistan’s headline inflation clocked in at 4.1% on a year-on-year basis in December 2024, lower than the reading in November 2024 when it stood at 4.9%.
In addition, the country’s current account posted a surplus of $582 million in December 2024, a significant increase of 109% when compared with the surplus of $279 million in the same month of the previous year. This was the fifth consecutive month of a current account surplus.
Foreign exchange reserves held by the State Bank of Pakistan (SBP) decreased by $276 million on a weekly basis, clocking in at $11.45 billion as of January 17, data released on Thursday showed.
The country’s total liquid foreign reserves were $16.19 billion, and its net foreign reserves held by commercial banks were $4.74 billion.
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