KARACHI: The Sate Bank of Pakistan SBP Interest Rate became the central headline on Monday after the State Bank of Pakistan announced a 100 bps cut, bringing the SBP policy rate down to 11 percent. The decision, shared through an official statement after the latest SBP monetary policy meeting, comes as inflation continues to ease and key economic indicators show early signs of improvement.

The Monetary Policy Committee (MPC) in the meeting said that inflation dropped sharply in March and April, mainly because electricity prices were reduced and food prices continued to ease. Inflation also drop during the month of April due to favorable base effects and moderate demand in the economy.

Overall, the MPC said that the inflation outlook has improved, but global uncertainty especially trade tariffs and geopolitical tensions  could still pose risks. For this reason, the Committee emphasized the need to keep monetary policy cautious and balanced.

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While making its decision, the Committee reviewed key developments since the last meeting. First, provisional data showed that real GDP grew by 1.7 percent in the second quarter of FY25, while growth for the first quarter was revised up to 1.3 percent from an earlier estimate of 0.9 percent.

Second, the current account recorded a sizable surplus of $1.2 billion in March, mainly due to record-high workers’ remittances. This surplus and SBP’s FX purchases partially cushioned the impact of large ongoing debt repayments on the SBP’s FX reserves.

Third, recent surveys show that both consumers and businesses are feeling more confident. However, tax collection continues to fall short of targets. The MPC also noted that rising global uncertainty — especially concerns about new tariffs — has led the IMF to sharply cut its growth forecasts for 2025 and 2026 for both advanced and developing countries. This uncertainty has also caused increased volatility in global financial markets and a significant drop in international oil prices.

On balance, considering the evolving developments and risks, the MPC viewed that the real policy rate remains adequately positive to stabilize inflation in the target range of 5 – 7 percent, while ensuring that the economy grows on a sustainable basis.

Real Sector

Real GDP growth was provisionally reported at 1.7 percent in Q2-FY25, bringing cumulative growth in H1-FY25 to 1.5 percent. This was in line with the MPC’s expectation. Furthermore, incoming high-frequency indicators suggest that economic activity is maintaining momentum, as reflected by rising sales of passenger vehicles and petroleum products (excluding furnace oil), increasing electricity generation, and improving business and consumer confidence.

Nonetheless, the MPC observed that LSM outturns continue to remain below expectations. This is driven by a sizable contraction in a few low-weight segments and construction allied sectors, which are more than offsetting positive growth momentum in key segments, such as garments, textiles, pharma, and automobiles.

In agriculture, while wheat output turned out to be better than the target, it remained lower than last year. The MPC kept its FY25 growth projection unchanged in the range of 2.5 – 3.5 percent and anticipates it to accelerate further in FY26. This outlook is, however, subject to risks, particularly from global uncertainty and unfavorable weather conditions for the upcoming Kharif season.

External Sector

The substantial current account surplus in March 2025, led mainly by record-high workers’ remittances, propelled the cumulative surplus to $1.9 billion during July-March FY25. The MPC observed that the moderation in ithe mport bill, mainly due to the reduction in global oil prices, along with the continued uptick in HVA-textile exports, also contributed to the current account surplus in March. However, for April,

PBS has reported the trade deficit to have risen sharply to $3.4 billion. On balance, supported by robust workers’ remittances, the MPC assessed the current account to remain in surplus during FY25.

The MPC observed that the net financial inflows have remained weak till March, mainly due to large debt repayments and delays in the realization of official inflows. Nonetheless, on the back of the expected realization of planned official inflows, the MPC expects SBP’s FX reserves to rise to $14 billion by June 2025.

Going forward, the MPC expects this build-up in FX reserves to continue in FY26, based on a moderate current account deficit and improved financial inflows. At the same time, the MPC cautioned that this outlook is subject to risks, particularly those emanating from the uncertain global economic and trade environment.

Fiscal Sector

FBR tax revenue recorded a sizable 26.3 percent y/y growth during July-April FY25, though it remained below the target. The MPC noted that the government raised PDL rates, which are expected to further propel non-tax revenues in the remaining months of FY25.

Moreover, estimates from the financing side suggest that overall expenditures remained relatively contained during July-March FY25. On balance, the Committee reaffirmed its earlier assessment that while the overall fiscal deficit may remain close to the FY25 target, achieving the targeted primary surplus appears to be challenging.

In this context, the MPC highlighted the need for reforms to put the fiscal sector on a more sustainable footing, especially by expanding the tax net and reforming SOEs. In this regard, the MPC acknowledged the recent legislation to increase agriculture income tax collection by the provinces and emphasized their effective implementation.

Money and Credit

The broad money (M2) growth accelerated to 13.3 percent y/y as of April 18 from around 11 percent at the time of the last MPC meeting. This was driven by both the NDA and the NFA of the banking system. The acceleration in NDA growth was entirely due to an uptick in credit to the private sector, which grew by 12.6 percent y/y, reflecting easing financial conditions and improving economic activity.

Specifically, firms in the textile, refinery, chemical, and fertilizer sectors increased their borrowing for working capital during July March FY25 as compared to the same period last year. Auto financing and personal loans have also risen this year. On the liability side, the currency in circulation recorded an Eid-related seasonal increase in March, which has partially reversed so far. This has led to an uptick in reserve money growth to 13.1 percent by April 18.

Inflation

Continuing its downtrend, headline inflation fell to 0.3 percent y/y in April, driven primarily by food and energy prices. A sharp decline in wheat and allied product prices, moderation in global commodity prices, and downward adjustment in electricity tariffs were the major drivers of this ease in food and energy prices.

These factors also contributed to the moderation in inflation expectations of consumers. Moreover, core inflation, after remaining sticky at around 9 percent over the past few months, declined to 8.0 percent y/y in April. Going forward, the Committee anticipates inflation to gradually inch up in the coming months and stabilize within the target range of 5 – 7 percent.

This outlook is, however, subject to both upside and downside risks emanating from volatility in wheat and other food prices, timing and magnitude of energy price adjustments, potential global supply-chain disruptions and uncertain commodity price outlook.