Pakistan’s sixth rate cut to potentially revive economy.

State Bank of Pakistan (SBP)  is poised to reduce its benchmark interest rate by at least 1 percentage point on Monday, marking its sixth consecutive cut to reinvigorate economic and business confidence amid a sharp deceleration in inflation. With rates already slashed by 900 basis points from a record 22% in June 2024, the central bank’s aggressive monetary easing surpasses its pandemic-era 625 bps reduction in 2020. Analysts view this move as pivotal for stabilizing the South Asian nation’s economy.

A Reuters survey of 15 analysts reveals a median forecast for a 100 basis points (bps) cut, with only one outlier predicting no change at 13%. Among the proponents of a reduction, 11 anticipate a 100 bps decrease, while others foresee deeper cuts of 150 or even 200 bps. Ahmad Mobeen of S&P Global Market Intelligence supports a 150 bps cut, citing subdued December inflation and a bolstered exchange rate due to an improved current account balance.

Inflation in Pakistan plunged to a 6.5-year low of 4.1% in December, far below the government’s projections and a stark contrast to May 2023’s 40% peak. The central bank’s December policy statement highlighted an expectation for inflation to average well below its prior estimates of 11.5%-13.5% for the year.

Nonetheless, inflationary pressures could resurface by May, warns Saad Hanif of Ismail Iqbal Securities (Pvt.) Limited, as base-year effects dissipate. He flags risks like higher energy tariffs, fresh tax measures, and potential petroleum levy increases, yet maintains his projection for a 100 bps cut, reflecting cautious optimism.