The State Bank of Pakistan (SBP) is expected to announce a 50 basis points (bps) cut in its policy rate to 11.5% during the upcoming monetary policy meeting scheduled for May 5, 2025, according to analysts at Arif Habib Limited. The expectation is based on a continued decline in inflation, a strong real interest rate cushion, and ongoing weakness in domestic industrial production.
Headline inflation dropped to 0.7% year-on-year in March 2025, the lowest level in approximately six decades, and is projected to fall further to 0.45% in April. This significant moderation has pushed real interest rates to around 11.3%, creating room for monetary easing while maintaining macroeconomic stability. For the 10-month period of FY25 (10MFY25), average headline inflation stands at 4.88%, compared to 26.22% during the same period last year.
Core inflation, however, remains elevated, with non-food, non-energy inflation (NFNE) projected at 7.72% year-on-year in April. The high base effect supporting disinflation is also expected to diminish in the coming months, potentially placing some upward pressure on future inflation readings.
On the external front, Pakistan posted a current account surplus of USD 1.2 billion in March 2025 and a cumulative surplus of USD 1.86 billion during 9MFY25, largely supported by a 33% year-on-year increase in remittances. Nonetheless, an 11% year-on-year rise in imports during the same period suggests that domestic demand may be gradually recovering, which could introduce new pressures on the external account.
Large-Scale Manufacturing (LSM) output contracted by 3.5% year-on-year in February 2025, reinforcing the case for additional monetary support to stimulate industrial activity. Meanwhile, money market behavior has been mixed, with longer-tenor yields trending lower while short-term yields have moved up slightly, indicating a cautious market outlook ahead of the monetary policy decision.
A recent survey by Arif Habib Limited found that 54.6% of respondents expect the SBP to lower the policy rate, with 18.2% specifically forecasting a 50bps cut. In contrast, 45.4% anticipate a status quo.
Compared to earlier market assessments, when a Topline Securities survey showed strong expectations for a rate cut but a baseline forecast of no immediate change, current data now presents a clearer case for monetary easing. Earlier, concerns regarding delayed external inflows and IMF guidance for tight monetary policy were key reasons cited for caution. However, more recent developments—including sharper-than-expected disinflation, a stronger external account position, and ongoing weakness in industrial production—have strengthened the argument for a measured reduction in the policy rate at this meeting.
