SBP Cuts Interest Rate by 100bps to 11% Amid Low Inflation and Market Divisions

The State Bank of Pakistan (SBP) announced a reduction in the policy rate by 100 basis points (bps), bringing it down to 11%, as inflation in April remained lower than expected. This marks the latest in a series of cuts, following a substantial reduction of 1,000bps from 22% since June 2024.

The decision, made during a meeting of the Monetary Policy Committee (MPC), came as the trade and industry sectors had been pushing for a more significant reduction. The MPC acknowledged that inflation in April stood at a low of 0.3%, primarily due to the high base from the previous year. Key factors contributing to the lower inflation included the reduced prices of staple foods like wheat, onions, potatoes, and pulses, as well as cuts in electricity and fuel charges. These items, which have a substantial weight in the Consumer Price Index (CPI), can heavily influence overall inflation with even minor price changes.

The SBP’s notification also pointed to the decline in prices of perishable food items and energy as main drivers behind the favorable inflation figures for April. The central bank’s move comes after varying opinions on the future direction of the interest rate, with some analysts expecting no change, while others speculated a 50bps reduction.

While inflation has decreased, there remains uncertainty due to external factors, including geopolitical tensions with neighboring India. The potential for higher inflation from unforeseen shocks could lead the SBP to take a more cautious stance in upcoming policy reviews.

In a surprising move in March, the central bank had opted to leave the policy rate unchanged, disappointing business circles who were hoping for a cut. The recent 100bps reduction, however, aligns with the SBP’s strategy to manage inflation while providing relief to the economy.