The State Bank of Pakistan (SBP) is expected to extend its rate-cutting cycle with another 50 basis points (bps) reduction in its upcoming monetary policy review on March 10, 2025, bringing the policy rate down to 11.5%, according to a report by Arif Habib Limited (AHL).
If implemented, this will mark the seventh consecutive rate cut since June 2024, driven by declining inflation and a stable external sector.
While headline inflation has dropped sharply, core inflation remains sticky, averaging 10.6% in 7MFY25 and expected to hover around 8-9% for the remainder of the fiscal year.
External Sector Stability Faces New Risks
Pakistan’s current account surplus stood at $682 million in 7MFY25, reversing last year’s $1.8 billion deficit. January 2025 saw a $480 million current account deficit, signaling renewed external pressures.
Additionally, imports have surged, with January 2025’s import bill exceeding $5 billion.
The Pakistani Rupee (PKR) has also weakened, depreciating 0.3% since mid-January 2025, now trading at 279.62 per USD.
Despite these challenges, remittances surged by 32% year-on-year (YoY) to $20.8 billion in 7MFY25, providing a cushion.
Money market yields have started creeping up, suggesting that the rate-cut cycle may be nearing its end. Since the January 2025 monetary policy, yields have risen across all tenors:
- 3-month yield: +27bps
- 6-month yield: +25bps
- 12-month yield: +29bps
- 3-year yield: +29bps
- 5-year yield: +14bps
- 10-year yield: +10bps
Money Market Yields Signal End of Rate Cuts
This upward trend signals that market participants expect the SBP to slow down rate cuts, reinforcing the view that the easing cycle is approaching its end.
Given falling inflation and stable foreign exchange reserves, a 50bps rate cut in March seems likely.
While the upcoming cut may ease borrowing costs for businesses, particularly amid a 1.9% YoY contraction in Large-Scale Manufacturing (LSM) in 1HFY25, the broader economic outlook suggests policymakers will tread carefully moving forward.
The SBP faces a delicate balancing act on March 10, weighing the need for growth against the imperative of macroeconomic stability.”
