SBP Cuts Policy Rate By 100 Bps To 11% Owing To Improved Inflation Outlook

The State Bank of Pakistan (SBP), taking a measured monetary policy stance on Monday, cut the policy rate by 100 basis points to 11 percent

KARACHI, (UrduPoint / Pakistan Point News - 5th May, 2025) The State Bank of Pakistan (SBP), taking a measured monetary policy stance on Monday, cut the policy rate by 100 basis points to 11 percent.

The central bank in its monetary policy statement informed that the decision to reduce the base rate, effective from May 6, 2025, was taken in a meeting of the Monetary Policy Committee (MPC) noting improved inflation outlook, comfortable position of current account and foreign reserves as well as heightened global uncertainties.

The Committee assessing further improvement in inflation outlook noted that inflation declined sharply during March and April while Core inflation also declined to 8% in April, primarily reflecting favorable base-effect amidst moderate demand conditions.

A sharp decline in wheat and allied product prices, moderation in global commodity prices and downward adjustment in electricity tariffs eased food and energy prices and it propelled headline inflation down to 0.3% in April while these factors also contributed to the moderation in inflation expectations of consumers, the MPC observed and anticipated that inflation would gradually inch up in the coming months and stabilize within the target range of 5 to 7%.

This outlook is, however, subject to “both upside and downside risks emanating from volatility in wheat and other food prices, timing and magnitude of energy price adjustments, potential global supply-chain disruptions and uncertain commodity price outlook.”

The Committee noted the key developments including 1.7% provisional real GDP growth for Q2-FY25, upward revision of Q1 growth to 1.3% and remittance based current account surplus of $1.2 billion in March as well as a shortfall in tax collection. Meanwhile, recent surveys suggest further improvement in both consumer and business sentiments.

At the same time, the Committee viewed that the heightened global uncertainty surrounding trade tariffs and geopolitical developments could pose challenges for the economy. The global uncertainty, particularly around tariffs, which triggered heightened financial market volatility and a sharp decline in global oil prices and led the IMF to sharply downgrade its 2025 and 2026 growth projections for both advanced and emerging economies.

The real policy rate remains adequately positive to stabilize inflation in the target range of 5-7%, while ensuring that the economy grows on a sustainable basis, the MPC viewed and noted that Real GDP growth was provisionally reported at 1.7% in Q2-FY25, bringing cumulative growth in H1-FY25 to 1.5% in line with the MPC’s expectation.

“Furthermore, incoming high-frequency indicators suggest that economic activity is maintaining momentum, as reflected by rising sales of passenger vehicles and petroleum products (excluding furnace oil), increasing electricity generation, and improving business and consumer confidence,” the MPC observed.

In agriculture, though wheat output turned out to be better than the target, it remained lower than last year,” the MPC noted but kept its FY25 growth projection unchanged in the range of 2.5-3.5% and anticipated it to accelerate further in FY26 depending on climate conditions and other factors.

The Committee noted that the substantial current account surplus in March 2025 propelled the cumulative surplus to $1.9 billion during July-March FY25. The MPC observed that record-high workers’ remittances, moderation in import bill, and the continued uptick in HVA-textile exports contributed to the current account surplus in March, however, a $3.4 billion trade deficit is reported for April. The MPC assessed that the current account will remain in surplus during FY25 with support of robust workers’ remittances.

Large debt repayments and delays in the realization of official inflows affected the net financial inflows till March, however the MPC on the back of the expected realization of planned official inflows, expected SBP’s FX reserves not only rise to $14 billion by June 2025 but this build-up to continue in FY26, based on a moderate current account deficit and improved financial inflows.

In the Fiscal Sector, the Committee observed that FBR tax revenue recorded a 26.3% growth during July-April FY25 and overall expenditures remained relatively contained during July-March FY25. On balance, the Committee “reaffirmed its earlier assessment that while the overall fiscal deficit may remain close to the FY25 target, achieving the targeted primary surplus appears to be challenging.”

In this context, the MPC highlighted the need for reforms to put the fiscal sector on a more sustainable footing, especially by expanding the tax net and reforming SOEs. The MPC also acknowledged the recent legislation to increase agriculture income tax collection by the provinces, and emphasized on their effective implementation.

The broad money (M2) growth, mainly driven by both the NDA and NFA of the banking system, accelerated to 13.3% as of April 18 from around 11 percent at the time of the last MPC meeting, the committee noted, adding that the uptick in credit to the private sector grew by 12.6%, reflecting easing financial conditions and improving economic activity.

Specifically, firms in textile, refinery, and chemical and fertilizer sectors increased their borrowing for working capital during July-March FY25 as compared to the same period last year while auto financing and personal loans have also risen this year, the Committee noted and added that the currency in circulation, on the liability side, Partial reversal of Eid-related seasonal increase in March has led to an uptick in reserve money growth to 13.1% by April 18.