The State Bank of Pakistan (SBP) is expected to announce its seventh consecutive rate cut on Monday as the country undergoes its first International Monetary Fund (IMF) review of a $7 billion bailout. With inflation at a near-decade low, analysts believe further easing is likely, which could help unlock additional IMF funding before the national budget in June.
Aggressive Rate Cuts Continue
Pakistan has been on one of the most aggressive monetary easing cycles among emerging markets. Over the past six months, the central bank has slashed interest rates by 1,000 basis points (bps), bringing the key rate down to 12% from its record high of 22% in June. The last cut, a 100 bps reduction, was implemented in January.
A Reuters survey of 14 analysts suggests another cut is on the horizon, with a median forecast of 50 bps. Among the respondents, six analysts predict a 50 bps cut, while others anticipate larger reductions of 75 to 100 bps. A few believe the SBP will pause rate cuts due to concerns over inflation rising in the coming months.
Inflation at Historic Lows but Expected to Rise
Pakistan’s February inflation rate stood at just 1.5%, a level not seen in nearly a decade. This sharp drop was primarily due to a high base effect from the previous year. However, experts warn that inflation could increase in March through May, which might slow further monetary easing.
Economist Ahmad Mobeen from S&P Global projects average inflation of 6.1% for 2025. He pointed out that while headline inflation has fallen, urban core inflation remains high at 7.8%, indicating persistent price pressures in cities.
Additionally, Pakistan’s HBL Manufacturing PMI report suggests that input costs for manufacturers have surged, leading to price hikes in February at the fastest rate since October 2024.
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Economic Growth and Foreign Reserves
Despite rate cuts, economic recovery remains sluggish. The SBP maintains its GDP growth forecast at 2.5% to 3.5% for the full fiscal year, but challenges persist. In Q1 FY25, GDP grew by only 0.9%, and large-scale manufacturing is still in negative territory.
According to Sana Tawfik, head of research at Arif Habib Limited, industrial production has yet to gain momentum. She stressed that for economic growth to accelerate, industrial activity and agricultural output must improve.
The Road Ahead
While the SBP’s aggressive rate cuts aim to stimulate growth, analysts believe interest rates may not fall below 10.5% to 11% due to potential inflationary pressures. The central bank’s policies will need to balance economic revival with inflation control, especially as Pakistan seeks to secure IMF funding and boost its foreign exchange reserves.
The upcoming rate decision will be crucial in shaping Pakistan’s economic trajectory, and all eyes will be on the SBP’s next move.
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