SBP slashes interest rate to 11%, beating market expectations

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KARACHI: The State Bank of Pakistan (SBP) on Monday reduced its key interest rate by 100 points to 11 percent, which cited the rapid decline in basic inflation over the past two months and rejecting most of the market expectations over the past two months.

The move is surprising, as a survey of most analysts and major brokerage firms predicted that the central bank would not change the policy rate, while some predicted a reduction of 50 twenty points (BPS). However, some people expected a steep cut like 100 BPS.

Explaining the move, the Monetary Policy Committee (MPC) said, “Inflation declined sharply during March and April, mainly due to the reduction of electricity prices and food inflation.”

The Central Bank had reduced its rate by 1,000 base points since June, citing the risk of rising prices, including the rise in US prices.

Analysts also said that the measured cut would support economic recovery without giving the big difference between interest rates and inflation, and improving weak external accounts.

The committee, which has met today to review financial policy, added that the recent decline in basic inflation also played a role. He noted, “Basic inflation also decreased in April, which mainly reflects the conducive basis between the terms of moderate demand.”

Overall, the MPC estimated that the inflation approach has improved the previous diagnosis.

At the same time, the committee found that the global uncertainty regarding trade prices and geographical political developments could become challenges of the economy.

Against this backdrop, the MPC emphasized the importance of maintaining the position of the measured monetary policy.

While reaching the verdict, the committee noted the following key progress since its last meeting. First, temporary real GDP growth for Q2-FY25 was reported annually 1.7 %, while Q1 growth was modified from 0.9 % to 1.3 %.

Second, the current account was recorded at a mass of $ 1.2 billion in March, the main reason is due to the records of the record high workers. The purchase of this additional and SBP foreign exchange reserves partially strained the impact of major loan payments on central bank reserves.

Third, recent survey suggests further improvement in both consumers and business sentiment. Fourth, tax collection is underway.

Finally, the global uncertainty, especially around the tariffs, has led the International Monetary Fund (IMF) to rapidly down its 2025 and 2026 growth estimates for both modern and emerging economies. The uncertainty of the price has also mobilized the fluctuations in the financial market and the rapid decline in global oil prices.

The IMF will review the $ 7 billion bailout loan program on May 9 and decide whether the first Billion is to divide 1 billion. It will also discuss a new 3 1.3 billion climate flexible loan.

On the balance, considering developing developments and risks, the MPC found that the actual policy rate is properly positive to stabilize inflation in the target limit of 5-7 %, while ensuring that the economy develops on a sustainable basis.

As expected by MPC, the real GDP growth was reported at 1.7 % at Q2-FY25, which has increased the total growth of 1.5 % in H1-FY25, which is expected to be MPC.

In addition, the upcoming high -frequency indicators suggest that the economic activity is maintaining pace, such as the increasing sales of passenger vehicles and petroleum products (excluding furnace oil), increasing power generation, and improving business and consumer confidence.

However, the MPC observed that the LSM out -turn is less than expectations.