Central Bank lowers main interest rate by 1 percentage point, setting it at 11%
The Monetary Policy Slash:
In a surprising turn of events, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) slashed the policy rate by a hefty 100 basis points (bps) to 11% in May 2025. This move was largely influenced by a striking plunge in inflation rates.
Here's a lowdown on the factors that played a part:
- Squeezing Inflation: Inflation took a dramatic nose-dive in April 2025, plummeting to a mere 0.3% year-over-year, down from the March figure of 0.7%. This descent can be attributed to a variety of elements, such as the tumbling prices of food essentials like wheat, onions, potatoes, and certain pulses, reduced energy and fuel expenses, and decreased electricity tariffs[3][4][5].
- Lowering Core Inflation: Core inflation also experienced a decrease in April, fueled by auspicious base effects and moderate consumer demand[4][5].
- Growing Economic Movement: The economy demonstrated signs of regaining momentum, as evidenced by high-frequency indicators and improved consumer and business sentiment surveys[4].
- Monetary Policy Equilibrium: The MPC aimed to find a fine balance between supporting economic growth and maintaining price stability by keeping the real policy rate positively robust, targeting an inflation range of 5-7%[4][5].
- Market Forecasts: Despite global uncertainties, the MPC's decision went beyond market predictions, which anticipated smaller adjustments or no change due to external pressures[3][5].
This move marks the fifth consecutive rate cut since June 2024, signaling a significant shift from the prior peak of 20.5%[4]. However, the MPC remains vigilant regarding potential risks to both inflation and the wider economy, which could enable further adjustments in the future. Stay tuned for more updates on this developing story!
- The decision to slash the policy rate by 100 basis points by the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) indicates a commitment to fostering growth in Pakistan's economy.
- The plunge in inflation rates, not only squeezing inflation but also lowering core inflation, has encouraged the MPC to take such a decisive action.
- The declining interest in Defi and the volatility in debt markets are global uncertainties that seemed less relevant to the MPC, as they did not significantly impact their decision-making process.
- The potential risks to both inflation and the wider economy continue to keep the MPC on high alert, as they remain open to making further adjustments as needed in the future.
- The outlook for business and finance in Pakistan is looking brighter due to the MPC's actions in reducing the policy rate, spurring investor interest and improving the overall economic outlook.
- Inflation, while currently in check, is a constant factor the MPC will need to monitor closely to ensure that it does not spiral out of control and jeopardize the overall economic growth experienced in the coming months.
- The success of the MPC's strategy will ultimately be determined by their ability to strike a balance between enabling growth and maintaining price stability in a manner that benefits the Pakistani economy as a whole.
