Key Rate Cut Announcement
The State Bank of Pakistan (SBP) has reduced the key policy rate by 200 basis points (bps), bringing it down to 13%. This marks the fifth consecutive cut since June 2024, when the rate stood at 22%. The reduction, effective from December 17, 2024, aligns with analysts’ expectations based on declining inflation trends.

Inflation Trends and Economic Growth
According to the SBP’s Monetary Policy Committee (MPC), the decision comes after headline inflation dropped to 4.9% year-on-year in November 2024, meeting the Committee’s expectations. This decrease was primarily due to a continued drop in food inflation and the fading effects of gas tariff hikes from November 2023.

However, the MPC noted that core inflation remains relatively high at 9.7%, indicating persistent inflationary pressures. The Committee also pointed out that inflation expectations among businesses and consumers remain volatile. Despite this, recent data suggests economic growth is stabilizing, driven by an uptick in high-frequency indicators of activity.

External Accounts and Fiscal Conditions
The MPC highlighted positive developments on the external account, with Pakistan’s current account registering a surplus for the third consecutive month in October 2024. This, along with stable global commodity prices, has helped boost the country’s foreign exchange reserves to $12 billion. However, tax revenue shortfalls remain a concern.

Monetary Easing Strategy
The MPC believes the cumulative policy rate reductions from June 2024 onwards are starting to show positive effects. Despite this, the real policy rate remains appropriately positive to keep inflation within the target range of 5–7%.

Market Expectations and Reactions
Expectations of further rate cuts had been building, with analysts and experts predicting a 200 bps reduction. Leading brokerage houses, such as Topline Securities and Arif Habib Limited, had forecasted this decision. Khurram Schehzad, the newly appointed Advisor to the Finance Minister on Economic and Financial Reforms, also indicated that the slowing inflation would lead to continued monetary easing, which would reduce the cost of capital for businesses and lower debt servicing for the government.

Recent Economic Developments
In the aftermath of the previous November 2024 meeting, the SBP reduced the policy rate by 250 bps, surpassing market predictions. Since then, several economic developments have occurred:

• The rupee depreciated slightly by 0.1%.
• Petrol prices increased by 1.5%.
• International oil prices remained relatively stable, hovering just above $70 per barrel.

Foreign Exchange Reserves
As of December 6, 2024, Pakistan’s foreign exchange reserves held by the SBP reached $12.05 billion, an increase of $13 million from the previous week. The total liquid foreign reserves in the country stood at $16.60 billion, with commercial banks holding $4.55 billion in net reserves.

Conclusion
The SBP’s decision to continue its monetary easing strategy is aimed at supporting economic growth while managing inflation and external account challenges. With a positive real policy rate and improved inflation control, Pakistan’s central bank is carefully balancing growth with price stability in the coming months.