Pakistan's central bank reduces its key policy rate by 100 basis points

Islamabad: Pakistan's central bank on Monday reduced its key policy rate by 100 basis points (bps) to 12 per cent from 13 per cent following an improvement in economic indicators.

The State Bank of Pakistan (SBP) Governor, Jameel Ahmed, said that the bank's Monetary Policy Committee (MPC) decided to cut the rate while keeping in sight the inflation outlook and other developments.

“Keeping these things in mind, we adopted a cautious approach,” he said.

The bank has regularly reduced the policy rate in six intervals since June 2024, slashing it by 1,000 bps from 22 per cent to the latest 12 per cent.

Ahmad highlighted a positive trend in remittances that helped the current account while inflation remained under 5 per cent, but he warned that core inflation remained high.

Regarding foreign exchange reserves, the governor said that the central bank maintained its outlook of achieving its goal of $13 billion in reserves by the end of June.

Separately, the bank said in a statement that inflation continued to trend downward in line with expectations, reaching 4.1 per cent year-on-year in December.

“This trend is driven by moderate domestic demand conditions and supportive supply-side dynamics, amidst favourable base effect,” it said, adding that inflation was “expected to come down further in January before inching up in the subsequent months”.

It further said that the current account remained in surplus in December 2024, though the reserves declined amidst low financial inflows and high debt repayments.

Despite regular cuts in the policy rate, the business community expected a major relief to bring it to single digits.

It is believed that the country should reduce it to around 7 per cent to promote growth.