What SBP’s interest rate cut to 11% means for the economy?

In a widely anticipated move, the State Bank of Pakistan (SBP) has reduced the benchmark policy rate by 100 basis points, bringing it down to 11%. This decision follows a noticeable decline in inflation, particularly in April 2025, and marks the beginning of a potentially new monetary easing cycle aimed at reviving economic activity.

Why the rate cut now?

The SBP’s decision was anchored in recent macroeconomic developments:

• Inflation has slowed sharply, with headline inflation down to just 0.3% YoY in April 2025—a dramatic improvement thanks to lower food and energy prices as well as a decline in electricity tariffs.
• Core inflation eased to 8.0%, reflecting reduced underlying price pressures, driven by a combination of base effects and moderated domestic demand.
• The inflation outlook has improved, although the SBP’s Monetary Policy Committee (MPC) remains cautious given global uncertainties like trade tensions and geopolitical risks.

Key economic developments since the last policy meeting

Real economy

• GDP growth for 2QFY25 came in at 1.7% YoY, while 1QFY25 was revised upward to 1.3%, taking 1HFY25 growth to 1.5%.
• High-frequency indicators such as auto sales, power generation, and petroleum (ex-furnace oil) sales have strengthened.
• The wheat production target was met, but still lagged behind last year’s output.
• Full-year GDP growth for FY25 is forecast between 2.5% and 3.5%, with higher growth expected in FY26.

External sector: A brighter picture

• The current account posted a USD 1.9 billion surplus in 9MFY25, supported by record remittances and falling oil prices.
• Lower import costs and improved textile exports drove the Mar’25 surplus.
• FX reserves are projected to reach USD 14 billion by June 2025, with expectations of further build-up in FY26. However, global uncertainties remain a key risk.

Fiscal sector challenges remain

• FBR tax collections grew by 26.3% YoY in 10MFY25, yet still fall short of targets.
• The petroleum levy is likely to provide a much-needed boost to non-tax revenues.
• Fiscal expenditures have been contained so far, with the overall deficit likely to remain near the FY25 target.
• Structural reforms, especially broadening the tax base, reforming SOEs, and enforcing provincial agriculture taxes, continue to be emphasized.

Money and credit trends

• M2 growth increased to 13.3% YoY, up from around 11%.
• Private sector credit grew by 12.6%, led by lending to textiles, refineries, chemical firms, and fertilizer companies.
• Uptick in auto loans and personal credit also reflects growing consumer confidence.
• Reserve money expanded by 13.1% as of April 18, 2025.

What lies ahead for inflation?

• Inflation is expected to gradually rise but stay within the SBP’s target range of 5–7%.
• Key risks to this outlook include:
  • Food price volatility
  • Energy pricing adjustments
  • Global supply chain issues
  • Unpredictable swings in commodity markets

Cautious optimism with room to breathe

The SBP’s 100bps rate cut marks a shift in tone—from tight monetary control to cautious support for economic recovery. With inflation easing and FX reserves on firmer ground, the policy space has widened. However, risks—both domestic and global—remain in play.

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For investors, borrowers, and businesses alike, this rate cut could be the signal of easier financial conditions ahead, but the path forward will depend heavily on how well Pakistan navigates external headwinds and structural reforms.

Source: AHL Research

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →

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