SBP may cut rates further by 100 bps: Bloomberg

August 18, 2025 (MLN): The State Bank of Pakistan has halved its policy rate to 11% since June 2024 and could cut rates by another 100 basis points in the current fiscal year that started in July, as Bloomberg reported.

According to the monetary policy framework, equal weight is given to each of the SBP’s reaction-function variables, inflation, the output gap, and the current account balance.

Three linear regressions were run, each considering one variable at a time to assess its impact on the policy rate.

On inflation, the projection of an average 6% in the current fiscal year suggests room for a further 250-basis-point cut.

Regarding the output gap, which is expected to be 0.5% below potential GDP in fiscal 2026, the model indicates a 25-basis-point cut.

For the current account balance, the consensus expects a deficit of 0.3% of GDP compared to a surplus of 0.5% in fiscal 2025, while the SBP projects a deficit in the range of 0–1% of GDP.

This still falls within a sustainable range and suggests a 25-basis-point cut.

Giving one-third weight to each variable, the framework indicates a net decline of around 100 basis points in the policy rate in fiscal 2026, aligning with the current forecast of further easing.

The SBP had kept rates on hold at its July meeting.

Risks to the outlook include upside surprises in inflation from unanticipated hikes in power and gas tariffs or sharp food price spikes due to heavy rainfall-related supply disruptions.

The current account deficit could also widen more than expected if commodity prices surge from geopolitical conflicts or if exports and remittances weaken due to a global growth slowdown, which would prevent further cuts.

The model details show all regressions were run on quarterly data from 3Q15 to 2Q25.

The inflation equation suggests the 11% policy rate remains high if inflation stands at 6%.

The output gap equation indicates a negative gap of 0.5% supports a 25-basis-point cut, while the current account balance equation implies a rate of 10.75% if the deficit is 0.3% of GDP, meaning another 25-basis-point cut from current levels.

The combined results, weighted equally, point toward a net 100-basis-point reduction.

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