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The State Bank of Pakistan (SBP) has cut its policy rate by 100 basis points, bringing it down to 11 percent, the lowest in over two years.
The decision came during the Monetary Policy Committee’s (MPC) meeting, aimed at stimulating growth amid signs of easing inflation in Pakistan.
The committee noted a sharp fall in inflation during March and April, driven by reduced electricity tariffs and falling food prices across the country.
Core inflation dipped to 8 percent in April, with the SBP projecting inflation to stabilize within the target range of 5-7 percent in the coming months.
On the other hand, the MPC warned that global uncertainties, specifically around trade tariffs and geopolitical growth, could pose risks to Pakistan’s economy.
The committee noted that heightened global uncertainty has triggered financial market volatility and a steep drop in global oil prices, while also citing the International Monetary Fund’s downgraded growth outlook for 2025 and 2026.
Economic Developments
GDP Growth:
Provisional data suggests Pakistan’s real GDP grew by 1.7 percent in the second quarter Q2-FY25, while growth for the first half stood at 1.5 percent.
Current Account Surplus:
A $1.2 billion current account surplus was recorded in March, aided by high remittances and reduced imports due to falling oil prices. The cumulative surplus for July–March FY25 reached $1.9 billion.
Fiscal Challenges:
FBR’s tax collection rose by 26.3 percent year-on-year but still missed the target, prompting the Monetary Policy Committee (MPC) to stress urgent fiscal reforms – particularly broadening the tax base and overhauling state-owned enterprises.
Foreign Exchange Reserves:
The MPC projected that the foreign exchange reserves to reach $14 billion by June 2025, backed by planned official inflows, though it warned of lingering risks from global trade uncertainties.
Sectoral Outlook:
The Monetary Policy Committee (MPC) maintained its FY25 GDP growth projection at 2.5 – 3.5 percent, despite mixed performance across sectors.
Agriculture suffered due to lower-than-expected wheat output, while large-scale manufacturing (LSM) weakened amid slowdowns in construction-allied and low-weight industries.
However, garments, textiles, pharmaceuticals, and automobiles showed encouraging growth, with MPC maintaining its FY25 growth projection of 2.5–3.5 percent, with projected acceleration in FY26.
On the external front, a $3.4 billion trade deficit in April reversed some gains seen in March. Still, strong remittances and contained imports are projected to keep the current account in surplus through FY25.
Monetary and Inflation Outlook
Money supply (M2) growth rose to 13.3 percent year-on-year by April 18, fueled by private sector credit, mainly in textiles, oil refineries, and automobiles. The MPC said the real policy rate remains high enough to control inflation without hindering growth.
While inflation is expected to rise gradually, it’s projected to stay within the 5 – 7 percent target range. Risks remain from food price swings, potential energy cost hikes, and global supply chain issues.
Policy Stance
The Monetary Policy Committee (MPC) stressed the need for a cautious approach to monetary policy in light of ongoing global and domestic challenges.
“Maintaining a measured approach is critical to ensuring economic stability amidst global uncertainties,” the committee stated, highlighting the urgency of fiscal reforms and the effective implementation of new agricultural tax laws.
While the recent policy rate cut signals optimism over a declining inflation trend, the MPC remains alert to external risks. Analysts believe the central bank will closely watch global market movements and Pakistan’s fiscal management in the months ahead.
