SBP Likely to Cut Key Interest Rate 6th Consecutive Time This Month

The State Bank of Pakistan (SBP) is expected to cut the monetary policy rate this month after 5 consecutive cuts in its previous five meetings last year. “Given the current economic conditions, we anticipate a 100bps rate cut in the upcoming monetary policy meeting of Jan’25. This would bring the policy rate down to 12%”, Arif Habib Limited said in a report. This comes as Inflation in Pakistan is showing a significant downward trend, with headline inflation projected to ease to 3.06% in January 2025, marking the lowest level in ~9 years. This follows a YoY inflation of 4.1% in December 2024, which was already an 80-month low. For context, inflation was a staggering 29.7% during the same period last year. Inflation is expected to remain below 5% through April 2025, driven by the favorable base effect. However, a reversal in this downward trend is likely in May and June, with inflation projections rising to 8.81% and 8.97%, respectively. This uptick is expected as the base effect dissipates after 1QCY25, pushing inflation upward. The sharp decline in inflation is attributed to several key factors, including the high base effect, PKR. The real interest rate is projected to reach 9.98% in January 2025, significantly higher than its historical average of ~2.5%. Additionally, the historical spread between policy rate and core inflation has averaged around 1.7% over the past nine years. These indicators suggest that the SBP has substantial room for further rate adjustments.