The State Bank of Pakistan (SBP) is gearing up to make a significant announcement on Monday, with analysts predicting a 200 basis point cut in interest rates. This expected reduction would mark the fifth consecutive rate cut since June 2024, bringing the total cut to 900 basis points for this year—the largest reduction in the interest rate for 2024.
This anticipated cut comes on the heels of a notable decrease in inflation, which dropped to 4.9% in November 2024, its lowest level in 79 months. This trend is expected to continue into December 2024, providing further justification for the rate cut.
Additionally, the country’s current account balance has shifted to a surplus of USD 349 million in the first four months of the fiscal year 2025, compared to a deficit of USD 1,528 million in the same period last year. A substantial 35% increase in remittances year-on-year, reaching USD 11.9 billion, has provided crucial support to the external sector.
The policy rate cut is anticipated to reduce production costs for industries, thereby encouraging a revival of demand, which has been hindered by high costs. This reduction is expected to address the 0.8% year-on-year decline in large-scale manufacturing growth for the first quarter of FY25.
Moreover, the SBP’s reserves have increased to USD 12.0 billion in November 2024 from USD 9.4 billion in June 2024, supported by the International Monetary Fund’s first tranche of USD 1.0 billion from the Extended Fund Facility and inflows from financial institutions such as the Asian Development Bank. This boost in reserves is likely to enable the SBP to cut interest rates while mitigating the risk of currency destabilization, as evidenced by the currency’s 0.14% appreciation in the fiscal year to date.