Pakistan’s central bank is poised to continue easing its monetary policy as it seeks to revive an economy that, until recently, grappled with the specter of default and one of the highest inflation rates in recent history. On Monday, the State Bank of Pakistan (SBP) will hold a pivotal policy meeting, where all 15 surveyed investors and analysts expect further reductions in the benchmark policy rate. After slashing the rate from an all-time high of 22% to the current 17.5% in recent months, policymakers are widely predicted to cut it again, with 200 basis points being the consensus estimate among experts.
The anticipated rate cut comes amid signs of stabilization in Pakistan’s fragile economy, which has shown recovery signs following the International Monetary Fund (IMF) bailout in June 2023. With inflation significantly lower than its peak earlier this year, analysts and economic experts believe the time is ripe for measures aimed at accelerating growth.
Pakistan’s Monetary Easing Efforts
The current wave of rate cuts began in June, in response to record-high inflation and stagnant economic growth. The central bank has since reduced its policy rate three times, bringing it down to 17.5%—still high by historical standards but a necessary step, policymakers argue, to revitalize the economy. In September, the SBP implemented a notable 200 basis point reduction, sending a clear signal of its commitment to monetary easing as the nation’s inflation figures began to recede from their recent highs.
While this shift in policy direction marks a positive development, experts are closely monitoring whether it will sustain momentum in the months ahead. Mustafa Pasha, Chief Investment Officer at Lakson Investments, emphasized that a rate below 15% sustained over six months would be crucial for real, long-term growth. “A consistent sub-15% rate will ease borrowing costs, encouraging private sector investment and creating more stable business conditions,” Pasha said.
Inflation Under Control but Risks Remain
In recent months, inflation has fallen sharply from the multi-decade high of nearly 40% recorded in May 2023. For October, inflation hovered at 7.2%, slightly higher than the government’s 6-7% target but still substantially lower than last year’s peak. This decline in inflation has offered much-needed respite to consumers and businesses, though experts warn that pressures could resume as early as next year.
The IMF has projected Pakistan’s gross domestic product (GDP) growth at 3.2% for the fiscal year ending June 2025, an improvement over the 2.4% growth seen in fiscal 2024. While the near-term economic outlook appears relatively stable, the IMF’s recent $7 billion standby arrangement necessitates adjustments, including possible increases in electricity and gas tariffs. These increases, coupled with additional taxes proposed in the June budget, could potentially stoke inflationary pressures by mid-2025.
Analyst Predictions on the Policy Rate Cut
As Monday’s SBP meeting approaches, analysts have expressed strong confidence in another rate cut, with most expecting a 200 basis point reduction, while a few project a rate cut of either 150 or 250 basis points. Here’s a breakdown of the predictions:
- 200 Basis Points (bps): AKD Securities, Arif Habib Limited, EFG Hermes, Equity Global, FRIM Ventures, Ismail Iqbal Securities, KTrade, Lakson Investments, Pak Qatar Investment Company, Spectrum Securities, Topline Securities, and Uzair Younus.
- 150 bps: JS Capital and S&P Global Market Intelligence.
- 250 bps: AWT Investments.
With the median expectation set at 200 bps, it’s evident that the majority of analysts believe the SBP will remain aggressive in its efforts to bring down rates to encourage economic expansion.
IMF’s Role and Economic Stability
The IMF’s recent approval of a $7 billion standby arrangement underscores the organization’s crucial role in aiding Pakistan’s economic recovery. The arrangement has allowed the SBP to accumulate reserves and maintain a degree of stability in the foreign exchange market, critical as the country faces ongoing fiscal and current account deficits. IMF officials have praised Pakistan’s progress in economic policy reforms, though they have also urged continued vigilance regarding inflation and fiscal discipline.
According to the IMF, Pakistan’s successful implementation of these reforms is central to stabilizing the economy and ensuring sustained growth. The IMF’s recent statement praised Pakistan’s commitment to sound policy implementation, which they attribute as instrumental in restoring stability since last summer when the country narrowly avoided default.
Challenges Facing Pakistan’s Economic Recovery
Despite positive developments, challenges remain for Pakistan’s economic outlook. Several structural issues could impede the nation’s economic recovery, including persistent energy costs, a lack of job creation, and volatility in global supply chains. Ahmad Mobeen, a senior economist at S&P Global Market Intelligence, pointed out that lower interest rates would only provide limited relief for Pakistan’s manufacturing sector, which faces high input costs due to elevated electricity and gas tariffs. “Manufacturers are under intense pressure,” Mobeen explained, “as high utility costs and persistent global supply chain disruptions constrain their ability to expand.”
The government’s ambitious reforms under the IMF standby arrangement require significant adjustments in the short term, potentially undermining some of the benefits of rate cuts. Economists caution that while the cuts will reduce financing costs, the broader economy will need to tackle structural challenges to achieve sustainable growth.
Expected Economic Impact of a Lower Policy Rate
If the SBP delivers on the anticipated rate cut, businesses, particularly in the manufacturing sector, are likely to benefit from reduced financing costs. A lower policy rate would improve credit availability and stimulate investment, especially within sectors that rely on capital-intensive operations. This, in turn, could boost production, increase employment, and bolster domestic consumption.
Additionally, easing monetary policy would positively impact Pakistan’s housing and construction sectors, which have seen a slowdown due to elevated borrowing costs. A rate cut would help these sectors rebound by making mortgages and construction loans more affordable, thereby potentially supporting job creation and economic growth. However, these benefits might be limited if inflation rebounds in 2025 due to higher energy costs, and new taxes are imposed on the retail and wholesale sectors.
Government and Finance Ministry Expectations
The Finance Ministry has set a target inflation rate of 5.5-6.5% for November, down from the October level of 7.2%. Officials within the ministry believe that sustained reductions in inflation will lay the groundwork for a steady economic revival, bolstered by a more favorable monetary environment. “Lower inflation rates are an opportunity to make further progress,” a ministry spokesperson stated, “and by managing utility and energy tariffs, we can create a sustainable path forward for inflation and growth.”
While the ministry is optimistic, it recognizes that maintaining low inflation will be challenging, given the external economic pressures. Global commodity prices, especially for energy, remain a key concern. Moreover, Pakistan’s reliance on imports for various goods makes it vulnerable to global price fluctuations, which could affect inflation levels despite domestic monetary adjustments.
Looking Ahead: Potential Implications of the Central Bank’s Decision
As the SBP prepares for its meeting, the central bank’s policymakers will need to balance the benefits of monetary easing against potential risks. Analysts agree that further rate cuts could help accelerate economic activity, yet they caution that any aggressive cuts should be carefully monitored to prevent unintended inflationary consequences.
- Potential Boost for Investment: Lower rates would reduce the cost of borrowing, encouraging investment across multiple sectors. This could generate employment opportunities, reduce poverty levels, and stimulate economic growth.
- Inflationary Risks: If inflationary pressures increase due to global price fluctuations or domestic policy shifts, the central bank may be forced to reassess its approach, potentially reversing rate cuts if necessary.
- External Market Pressures: Pakistan’s heavy reliance on imports leaves it susceptible to global economic shifts, including rising commodity prices and changes in international trade dynamics. As such, the SBP’s policy choices will likely be influenced by both domestic and global factors.
