By Ariba Shahid
KARACHI, Pakistan (Reuters) -Pakistan’s central bank cut its benchmark interest rate by 100 basis points to 12% on Monday, in line with expectations, as inflation eases and growth looks to set to pick up after 1,000 basis points of rate cuts over the last six months.
The State Bank of Pakistan has slashed rates from an all-time high of 22% last June, one of the most aggressive moves among central banks in emerging markets and exceeding its 625 bps of rate cuts in 2020 during the COVID-19 pandemic.
The bank’s governor Jameel Ahmad said at a press conference that the inflation rate would ease further in January but noted core inflation remained elevated. He forecast full-year inflation in the year to June would average 5.5%-7.5%.
“Considering these developments and evolving risks, the Committee viewed that a cautious monetary policy stance is needed to ensure price stability,” the bank’s monetary policy committee said in a statement accompanying the decision.
“The real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5 – 7 percent,” it added.
Fourteen of 15 analysts surveyed by Reuters expected the central bank to cut its key rate by at least 100 bps mainly due to weaker inflation.
Pakistan’s consumer inflation rate fell to 4.1% in December, its lowest in more than six years, helped by favourable base effects. That was below the government’s forecast and down from a multi-decade high of around 40% in May 2023.
The bank maintained its forecast of full-year GDP growth at 2.5%-3.5% and predicted faster growth would help boost the country’s previously struggling foreign exchange reserves.
“The improved current account outlook, along with the expected realization of planned financial inflows, is likely to increase the SBP’s FX reserves beyond $13 billion by June 2025,” the bank’s statement said.
Pakistan posted a current account surplus of $0.6 billion in December, bringing the cumulative surplus to $1.2 billion for the first half of the current fiscal year, the bank said, adding the outlook for the current account balance had improved considerably.
However the central bank also highlighted several risks for inflation, including protectionist policies by “major economies”. U.S. President Donald Trump has said he is considering imposing tariffs on goods from several countries.
Under a $7 billion IMF bailout, Pakistan’s $350 billion economy grew 0.92% in the first quarter of fiscal 2024-25 which ends in June, according to data approved by the National Accounts Committee and released in December.
The IMF will conduct a first review of the loan in March, the governor said.
“We have taken all actions required by the IMF from the central bank’s side,” he added.
(Reporting by Ariba Shahid in Karachi and Islamabad newsroom; Editing by YP Rajesh, Toby Chopra, Bernadette Baum, Hugh Lawson and Christina Fincher)
