Pakistan’s central bank is expected to announce yet another rate cut in on Monday, marking the seventh consecutive reduction as the country navigates its economic revival with support from the International Monetary Fund’s (IMF) $7 billion bailout.
This comes as Pakistan experiences some of its lowest inflation rates in nearly ten years.
Over the past six months, the central bank has aggressively lowered the key interest rate by 1,000 basis points (bps), taking it from a record 22 per cent in June to 12 per cent in January, with the most recent cut being 100 bps.
These rate cuts are part of Pakistan’s commitment to meet IMF reform conditions, which could unlock additional funds from the lender, especially as the country undergoes the first review of the bailout package. A favourable review is crucial, as it could release much-needed funding just ahead of Pakistan’s upcoming budget in June.
In February, the inflation rate dropped to just 1.5 per cent, its lowest in almost a decade. This was largely due to the high inflation base from a year ago, which has now evened out.
A survey of 14 economists by Reuters reveals expectations of another rate cut, with the majority predicting a 50 bps reduction. Out of the ten analysts anticipating a cut, three expect a 100 bps reduction, one foresees a 75 bps cut, and six are leaning towards 50 bps. Meanwhile, four economists believe the central bank will hold rates steady.
However, analysts who expect the cuts to continue believe the reductions may halt once rates reach 10.5 to 11 per cent. They caution that inflation could begin to rise again in the coming months, particularly from March to May.
Ahmad Mobeen, a senior economist at S&P Global, predicts that inflation will bottom out during the first quarter of 2025 before gradually rising. He estimates an average inflation rate of 6.1 per cent for the year, noting that while the Consumer Price Index (CPI) has fallen significantly, core urban inflation remains high at 7.8 per cent, indicating sustained price pressures.
“S&P Global’s Pakistan Manufacturing PMI shows input costs for manufacturers are on the rise, prompting price hikes at the fastest rate since October last year,” Mobeen explained.
Despite the central bank’s recent policies, the country’s economic growth is yet to pick up momentum. The bank still projects a GDP growth rate of 2.5 to 3.5 per cent for the full year, which it believes will help stabilise the country’s foreign reserves.
While Pakistan’s GDP grew by 0.9 per cent in the first quarter of FY25, large-scale manufacturing remains sluggish, and the impact of lower interest rates has yet to be felt in terms of production. According to Sana Tawfik, head of research at Arif Habib Limited, the growth target remains dependent on a rebound in industrial activity and improvements in the agricultural sector.
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