Pakistan Cuts Key Policy Rate

By Ariba Shahid

KARACHI (Reuters) – Pakistan's central bank announced a 200 basis points cut in its key policy rate to 13% on Monday, marking its fifth consecutive reduction since June as part of efforts to revive a sluggish economy amidst easing inflation.

This year's cumulative cuts total 900 basis points, surpassing the 625 basis points cut in 2020 during the pandemic, positioning Pakistan's central bank among the most aggressive in recent easing cycles among emerging markets.

The monetary policy committee stated, "Overall, the Committee assessed that its approach of measured policy rate cuts is keeping inflationary and external account pressures in check while supporting sustainable economic growth."

The bank anticipated that inflation would average substantially below its previous forecast of 11.5% to 13.5% for 2025, although risks remain, such as government revenue measures, food inflation, and rising global commodity prices. The bank warned, "Inflation may remain volatile in the near term before stabilizing."

In a discussion with analysts, central bank chief Jameel Ahmad indicated that while they did not target a specific real interest rate, the central bank had historically aimed for 5-7% inflation, which is expected to be achievable within the next year.

Supported by a $7 billion facility from the International Monetary Fund (IMF) obtained in September, Pakistan is trying to navigate its economic recovery. The bank pointed out that significant efforts are needed to meet its annual revenue targets, a focus of the IMF agreement.

Analysts had predicted the 200 bps cut after inflation dropped to 4.9% in November, largely due to a high base from the previous year, down from a peak of around 40% in May.

Tahir Abbas, head of equities and research at Arif Habib Limited, stated, "The cut supports economic growth, reflected in improved industrial activity and credit expansion. However, core inflation and revenue shortfalls remain persistent risks to monitor."

This recent cut follows previous reductions of 150 bps in June, 100 bps in July, 200 bps in September, and a record 250 bps in November, lowering the rate from an all-time high of 22% set in June 2023 and unchanged for a year.