The Monetary Policy Committee (MPC) is scheduled to convene its next meeting on May 5, 2025, and we anticipate the State Bank of Pakistan (SBP) to reduce the policy rate by 50 basis points to 11.5% in the upcoming monetary policy. At its March 2025 monetary policy meeting, the SBP maintained a status quo stance, citing risks from volatile food and energy prices and external account pressures. However, it also acknowledged a continued decline in inflation and a sufficiently positive real interest rate on a forward-looking basis.

§  Given the sustained disinflationary trend and ample real interest rate cushion, we believe there is still room for a measured rate cut to support economic recovery without undermining macroeconomic stability.

Low inflation creates room for cautious cut

§  The marked decline in inflation stands as the primary catalyst behind our expectation of a policy rate cut. In Mar’25, headline inflation dropped to a ~6-decade low of 0.7%, and is projected to ease further to a historic low of 0.45% in Apr’25.

§  This sharp moderation has pushed real interest rates to an exceptional ~11.3pps, creating significant room for monetary easing.

§  For 10MFY25, average headline inflation is estimated at 4.88%—a substantial improvement from 26.22% recorded during SPLY—largely driven by high base effects and softened food prices.

§  However, the high base effect is expected to dissipate in the coming months, potentially placing upward pressure on inflation.

§  At the same time, core inflation (NFNE) remains elevated projected at 7.72% YoY in Apr’25, with a 10MFY25 average of 10.05%.

Courtesy – AHL Research