SBP cuts policy rate by 100bps, total drop hits 1,000bps

January 28, 2025 (MLN): The Monetary Policy Committee of the State Bank of Pakistan (SBP) has decided to reduce the policy rate by 100 basis points, bringing the cumulative decrease to 1,000 basis points since June last year.

Governor Jameel Ahmad, in an interview with Bloomberg, attributed the decision to favorable trends in inflation, the external account, and overall economic stability.

Governor Ahmad highlighted that headline inflation had significantly dropped from 38% in May 2023 to 4.1% in December 2023.

While core inflation remains slightly elevated at 9%, it is still well below the levels observed during the last policy cut in December 2023. "Given the current situation, we are in a position to reduce the rate as inflationary concerns have eased," he said.

The Governor noted that the central bank's decision was also influenced by stability in the external account.

The current account posted a $1.2 billion surplus for the July–December 2023 period, compared to a $1.4bn deficit during the same period last year.

This improvement, along with steady foreign exchange reserves and a stable exchange rate hovering between 78 and 79 rupees per dollar has provided the bank with confidence to adjust the policy rate.

Ahmad emphasized that the SBP has been monitoring global commodity prices, particularly oil, which plays a crucial role for Pakistan as an oil-importing country.

The bank's forecasts have already factored in conservative price estimates, giving policymakers room for flexibility.

Additionally, measures taken to combat smuggling, enhance the oversight of exchange companies and ensure tighter control over currency markets have contributed to greater stability.

"The difference between interbank and open market rates has narrowed significantly," Ahmad noted, adding that these efforts have positively impacted the currency markets.

On the trade front, Ahmad remarked that Pakistan, being an import-dependent economy with significant exports to Europe and the US, has not faced major disruptions from protectionist policies or trade barriers.

The central bank remains optimistic about maintaining trade stability.

Regarding debt repayments, Ahmad revealed that Pakistan has a total rollover of $26.1bn for the current fiscal year, of which $16bn, including $12.3bn in bilateral loans and $3.7bn in commercial loans, is expected to be rolled over.

He confirmed that $7.3 billion in bilateral loans has already been rolled over, with $5bn more expected in the remainder of the fiscal year.

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