Pakistan’s central bank is widely anticipated to lower its key policy rate at its upcoming meeting on January 26th. A Reuters poll indicates a likely reduction of 50 basis points, though opinions vary among analysts regarding the extent of the cut.
Shifting Monetary Policy
This potential move signals a significant shift from the State Bank of Pakistan’s (SBP) previous aggressive tightening cycle. In 2023, rates reached a record high of 22 percent. Since mid-2024, the SBP has implemented cumulative cuts totaling 1,150 basis points, including a surprise reduction in December that ended a four-month pause.
Seven of ten analysts surveyed predict a 50 basis point cut, which would bring the policy rate to 10.5 percent. Two analysts foresee a more substantial reduction of 75 basis points, while one anticipates the SBP will hold rates steady.
Factors Influencing the Decision
The expectation of easing monetary policy is driven by moderating inflation, improved foreign exchange reserves, and a stabilizing rupee. Waqas Ghani, Head of equity research at JS Global Capital, noted that while non-food inflation remains elevated, expectations remain anchored due to the overall easing inflation outlook and strengthened external buffers.
Sana Tawfik, head of research at Arif Habib Limited, suggests Pakistan may soon return to a single-digit policy rate, citing improving growth momentum, stable reserves, and inflation below the central bank’s medium-term target.
Potential Risks and Alternative Views
Despite the positive indicators, some analysts caution against rapid easing. Fawad Basir, head of research at KTrade, highlighted geopolitical uncertainty and its potential impact on fuel prices as reasons for a more measured approach. AKD Securities anticipates the central bank may hold rates unchanged until July.
Recent data shows inflation slowed to 5.6 percent year-on-year in December, though non-food inflation remains a concern. The SBP has indicated that core inflation is “sticky” and headline inflation could temporarily rise due to base effects. The International Monetary Fund has also cautioned against premature monetary easing in light of Pakistan’s $7 billion loan program.
Frequently Asked Questions
What is a basis point?
A basis point is one-hundredth of a percentage point. So, 50 basis points equals 0.50 percent.
When is the SBP’s Monetary Policy Committee scheduled to meet?
The SBP’s Monetary Policy Committee is scheduled to meet on January 26th (Monday).
What was the previous policy rate before the December cut?
Prior to the surprise cut in December, the policy rate was 10.5 percent.
How will these potential changes impact Pakistan’s economic future?
