State Bank of Pakistan Reduces Policy Rate by 1% to 12%, Aims to Boost Economy Amid Easing Inflation
The State Bank of Pakistan (SBP) announced a 100 basis point reduction in its key policy rate, bringing it down to 12%, Governor Jameel Ahmed revealed during a press briefing on Monday. This marks the sixth consecutive rate cut since June 2024 as Pakistan strives to revive economic activity and restore business confidence amid declining inflation.
Governor Ahmed stated that inflation is expected to ease further in January, though core inflation remains elevated. The central bank’s Monetary Policy Committee (MPC) highlighted the need for a cautious monetary policy stance to ensure price stability, a critical component for sustainable economic growth.
The MPC stated that the real policy rate must remain adequately positive on a forward-looking basis to stabilize inflation within the target range of 5–7%.
Aggressive Rate Cuts
Since June 2024, the State Bank of Pakistan has reduced interest rates by a total of 1,000 basis points, down from a record high of 22%. This is one of the most aggressive rate-cutting campaigns among emerging markets, even surpassing the 625 basis points cut during the COVID-19 pandemic in 2020.
The MPC noted that the impact of these significant rate cuts would continue to support economic activity. Inflation, which fell to 4.1% year-on-year in December, has been trending downward due to moderate domestic demand, favorable supply-side dynamics, and a supportive base effect. This is a sharp decline from the multi-decade high of 40% in May 2023.
Economic Outlook and Growth Forecast
The SBP maintained its full-year GDP growth forecast at 2.5%-3.5%, expecting economic growth to accelerate in the next six months. This growth is anticipated to strengthen the country’s foreign exchange reserves, which are projected to surpass $13 billion by June 2025 due to an improved current account outlook and planned financial inflows.
The bank also addressed potential risks to inflation, including global protectionist policies and heightened oil price volatility.
IMF Commitments and Debt Servicing
Governor Ahmed assured that the State bank has fulfilled all requirements set by the International Monetary Fund (IMF) for its ongoing review and expressed confidence in the process. He also noted that $7.3 billion in debt repayments had already been rolled over in the current fiscal year.
Ahmed dismissed concerns about exchange rate instability and announced the upcoming launch of the InvestPak platform, which will enable individuals and corporations to purchase government securities directly.
Economic Indicators and Challenges
Pakistan’s economy grew by 0.92% in the first quarter of the 2024-25 fiscal year, according to the National Accounts Committee. While the current account remained in surplus in December 2024, foreign exchange reserves were under pressure due to low financial inflows and high debt repayments.
Despite a substantial rise in December, tax revenues in the first half of FY25 fell short of targets. Global economic uncertainty and volatility in oil prices have also prompted central banks, including the SBP, to adopt a cautious approach.
The SBP emphasized that it remains committed to supporting sustainable growth while maintaining inflation within its target range.
Cryptocurrency Adoption and Regulation
Responding to a question about cryptocurrency, the Governor of the State Bank of Pakistan (SBP) informed the press that the central bank is actively researching and exploring the possibilities of adopting cryptocurrency in Pakistan. He stated that the SBP aims to learn from the cryptocurrency models implemented in developed countries and adapt their best practices to suit the local context.
The governor emphasized that the bank is focusing on capacity building to equip its workforce and stakeholders with the necessary knowledge and skills to manage and regulate cryptocurrency effectively. This includes developing mechanisms for proper trading of cryptocurrencies, ensuring transparency, and minimizing risks associated with such transactions.
Additionally, the SBP is working on establishing a robust legal framework to provide clear guidelines for cryptocurrency use in the country. This includes drafting proper laws, setting up regulatory bodies, and creating a comprehensive set of regulations to govern the cryptocurrency ecosystem. These measures are intended to ensure that cryptocurrencies are traded securely while protecting the interests of investors and preventing illicit activities such as money laundering or fraud.
