The State Bank of Pakistan (SBP) on Monday announced that it had decided to reduce its key policy rate by 100 basis points (BP) to 12 percent from 13 percent amid demands for a major rate cut.
The Central Bank’s policy rate, after being reduced by 1,000bps from 22 percent from June 2024 in six intervals, now stands at 12 percent.
Addressing a press conference, SBP Governor Jameel Ahmed announced that the Monetary Policy Committee (MPC), in its meeting today, had decided on interest rate reduction keeping in mind the inflation outlook and other developments.
Furthermore, the central bank chief noted a positive trend in remittances. He also highlighted that inflation numbers were also bound to come down in January, however, he warned that core inflation was still high.
“Keeping these things in mind, we adopted a cautious approach,” he said, adding that the remittance trend was “good” and so were the export numbers, keeping the current account in sight.
Regarding foreign exchange (FX) reserves, the governor said the central bank maintained its outlook of reaching its target of $13 billion in FX reserves by the end of June.
A statement later released by the SBP said: “The committee noted that inflation continued to trend downward in line with expectations, reaching 4.1pc y/y [year-on-year] in December.
“This trend is driven by moderate domestic demand conditions and supportive supply-side dynamics, amid the favorable base effect,” he noted, adding that inflation was expected to go further in January before advancing in the later months.”
Furthermore, the committee also emphasized that core inflation remained elevated.
“At the same time, high-frequency indicators continued to show a gradual improvement in economic activity,” the statement said.
In its key developments, the MPC highlighted that real GDP growth had turned out to be lower than the committee’s expectations.
“Secondly, the current account remained in surplus in December 2024, although the SBP’s FX reserves declined amid low financial inflows and high debt repayments,” it said.
Third, he noted that despite “a substantial increase in December, tax revenues remained below target.”
“Fourth, global oil prices have exhibited increased volatility in recent weeks,” he noted.
Taking into account these developments and evolving risks, the committee “saw that a cautious monetary policy stance is needed to ensure price stability.”
Meanwhile, the government had reduced cut-off yields on Treasury bills (T bills) at auction last week, reflecting a greater possibility of another interest rate.
T-bill rates were reduced by up to 41 basis points as the government increased the amount within the auction target. The yield on a 12-month tenor fell by 41bps to 11.38pc compared to 49bps at the auction held on January 8, making the total reduction 90bps this month.
Most financial experts and analysts had believed that the SBP would reduce the interest rate by 100 bps at its MPC meeting today.
