Pakistan’s central bank seen cutting rates again after December surprise

KARACHI: Pakistan’s central bank is expected to cut its key policy rate by 50 basis points (bps) at its upcoming meeting, a Reuters poll showed, as easing inflation, improving foreign exchange buffers, and a stabilising rupee bolster the case for further monetary easing despite lingering risks.

Of the 10 analysts surveyed, seven expect the State Bank of Pakistan (SBP) to cut rates by 50bps, two see a deeper 75bps reduction, while one expects the central bank to hold rates unchanged, following a surprise cut in December that ended a four-meeting pause.

The median forecast points to a 50bps cut. That would cement a change in direction from the SBP’s aggressive tightening cycle after rates peaked at a record 22% in 2023, with cumulative cuts since mid-2024 totalling 1,150 basis points so far.

Analysts projecting a 50bps move cited moderating inflation, higher foreign exchange reserves and a better balance of payments outlook, while flagging the need for caution given persistent core inflation and geopolitical risks.

Single-digit rates back in sight at upcoming MPC

“The inflation outlook has eased marginally, and external buffers have strengthened, giving the SBP room to support growth,” said Waqas Ghani, Head of equity research at JS Global Capital, adding that expectations remain anchored despite elevated non-food inflation.

Those expecting a larger cut argue that macroeconomic conditions are now aligned for more decisive easing. “Pakistan appears on the verge of returning to a single-digit policy rate,” said Sana Tawfik, head of research at Arif Habib Limited, pointing to improving growth momentum, stable reserves and inflation running below the central bank’s medium-term target.

A 50 basis point cut would bring Pakistan’s policy rate to 10.5%.

The cautious camp, however, warned that risks remain.

Fawad Basir, head of research at KTrade, cited geopolitical uncertainty and its impact on fuel prices as a reason for a measured pace of easing, while AKD Securities expects the central bank to hold rates until July.

The survey follows data showing inflation slowed to 5.6% year-on-year in December, with prices falling on a monthly basis due to lower perishable food costs, though non-food inflation remains elevated.

The SBP has said inflation stayed within its 5%–7% target range during July–November but warned core inflation remains sticky and headline inflation could rise temporarily toward the end of the fiscal year due to base effects.

The International Monetary Fund in a report has cautioned against premature monetary easing under Pakistan’s $7 billion loan programme.