State Bank Cuts Interest Rate by Another 1%, Now Set at 11%
Inflation Declined Rapidly in March and April: State Bank
Karachi (Web News)
The State Bank of Pakistan (SBP) has reduced the policy rate by another 1%, bringing it down to 11%. According to details, the Monetary Policy Committee (MPC) decided in its meeting to reduce the policy rate by 100 basis points to 11%, effective from May 6, 2025. The committee noted that inflation declined rapidly in March and April due to reductions in government electricity tariffs and continued decreases in food inflation. Core inflation also declined in April, primarily reflecting favorable base effects and moderate demand conditions. Overall, the MPC assessed that the inflation outlook has improved further compared to previous projections.
However, the committee also acknowledged that increased global uncertainty regarding trade tariffs and geopolitical conditions pose challenges for the economy. Against this backdrop, the MPC emphasized the importance of maintaining a cautious monetary policy stance. While making this decision, the committee considered key developments since the last meeting.
Firstly, provisional real GDP growth for the second quarter of FY25 was recorded at 1.7% year-on-year, while the first quarter’s growth was revised upward from 0.9% to 1.3%. Secondly, a significant current account surplus of $1.2 billion was recorded in March, mainly due to record-high workers’ remittances. This surplus, along with SBP’s foreign exchange purchases, partially offset the impact of large debt repayments on SBP’s reserves.
Thirdly, recent surveys indicated further improvements in both consumer and business sentiments. Fourthly, tax revenue shortfalls continued to grow. Lastly, due to global uncertainty—especially concerning tariffs—the IMF has significantly downgraded its growth forecasts for both developed and emerging economies for 2025 and 2026. Tariff-related uncertainties have also led to increased financial market volatility and a sharp decline in global oil prices.
According to the SBP spokesperson, given the evolving conditions and associated risks, the committee assessed that the real policy rate remains sufficiently positive to anchor inflation within the 5–7% target range while supporting sustainable economic growth.
Provisional GDP growth in the second quarter of FY25 was 1.7%, bringing overall growth in the first half of FY25 to 1.5%, which aligns with MPC expectations. Moreover, high-frequency indicators suggest continued momentum in economic activity, reflected in rising sales of passenger cars and petroleum products (excluding furnace oil), increased electricity production, and improving business and consumer confidence.
Nevertheless, the MPC noted that large-scale manufacturing (LSM) performance remained below expectations, primarily due to contractions in a few low-weight components and construction-related sectors. This offset positive growth in key sectors such as garments, textiles, pharmaceuticals, and automobiles. In agriculture, wheat production exceeded targets but remained below last year’s levels. The MPC maintained its FY25 growth forecast in the range of 2.5% to 3.5% and expects further improvement in FY26. However, this outlook is subject to risks, especially due to global uncertainty and potentially unfavorable weather for the upcoming Kharif season.
In March 2025, the current account surplus—driven by record-high workers’ remittances—brought the cumulative surplus for July–March FY25 to $1.9 billion. The MPC noted that due to lower global oil prices, the import bill remained moderate, and continued increases in value-added textile exports also contributed to the March surplus. However, according to the Pakistan Bureau of Statistics (PBS), the trade deficit surged to $3.4 billion in April. The committee estimated that with continued strong remittances, the current account will remain in surplus for FY25.
The MPC noted that net financial inflows remained weak until March due to large debt repayments and delays in official inflows. Nonetheless, based on expected disbursements of scheduled official inflows, the MPC anticipates SBP’s foreign exchange reserves to rise to $14 billion by June 2025. It further expects this increase to continue into FY26, assuming a moderate current account deficit and improved financial inflows. The committee warned, however, that this outlook is subject to risks, especially from uncertain global economic and trade environments.
According to the fiscal sector report, FBR tax revenue grew 26.3% year-on-year during July–April FY25, though it remained below target. The MPC noted that the government has raised Petroleum Development Levy (PDL) rates, which is expected to increase non-tax revenue in the remaining months of FY25. Additionally, fiscal estimates suggest that total expenditures remained relatively low during July–March FY25. Overall, the MPC confirmed its previous forecast that while the overall fiscal deficit may remain close to the FY25 target, achieving the targeted primary surplus appears difficult.
In this context, the MPC emphasized the need for reforms to make the fiscal sector more sustainable, especially by broadening the tax net and reforming state-owned enterprises (SOEs). The MPC appreciated recent legislation by provinces to increase agricultural income tax collection and emphasized its effective implementation.
As of April 18, broad money (M2) growth reached 13.3% year-on-year, compared to about 11% at the time of the previous MPC meeting. Both net domestic assets and net foreign assets of the banking system contributed to this increase. Growth in net domestic assets was entirely due to lending to the private sector, which grew 12.6% year-on-year, reflecting easier financial conditions and improved economic activity. Notably, during July–March FY25, firms in the textile, refinery, chemical, and fertilizer sectors increased their borrowing for working capital compared to the same period last year. Auto financing and personal loans also increased this year. On the liabilities side, due to Eid in March, currency in circulation temporarily rose but has since partly reversed. As a result, reserve money growth rose to 13.1% by April 18.
The trend of declining inflation continued in April, falling to 0.3% year-on-year, mainly due to decreases in food and energy prices. Significant drops in the prices of wheat and wheat products, moderation in global commodity prices, and reductions in electricity tariffs were major drivers of this decline. These factors also helped moderate consumer inflation expectations. Furthermore, after hovering around 9% in recent months, core inflation fell to 8.0% year-on-year in April.
The committee estimates that inflation will gradually rise in the coming months but will stabilize within the 5–7% target range. However, this outlook is subject to risks such as fluctuations in food prices, changes in energy prices, disruptions in global supply chains, and uncertainties in future commodity prices.