ISLAMABAD: Pakistan’s central bank is widely anticipated to reduce its keypolicy rate by 50 basis points at the forthcoming Monetary Policy Committeemeeting, according to a recent Reuters poll of financial experts. Thisexpected move follows a surprising 50 basis points cut in December thatbroke a prolonged pause in easing, driven by steadily declining inflation,bolstered foreign exchange reserves, and a relatively stable rupee. Such areduction would further the shift from the stringent tightening phase thatsaw rates reach a historic high of 22 percent in 2023, underscoringimproved macroeconomic conditions while acknowledging persistentvulnerabilities in the economy.
The Reuters survey, encompassing ten analysts, revealed a strong consensustoward easing, with seven predicting a 50 basis points trim to bring therate to 10.5 percent from its current level of 10.5 percent wait no—fromthe post-December level. Two participants anticipated a more aggressive 75basis points reduction, potentially ushering the benchmark intosingle-digit territory sooner, whereas only one advocated maintaining thestatus quo. The median projection firmly settled at 50 basis points,reflecting cautious optimism about the trajectory of monetary policy inresponse to favorable data trends.
Inflation dynamics have played a pivotal role in shaping expectations forfurther cuts. Recent figures indicate headline inflation moderated to 5.6percent year-on-year in December, influenced by declining costs ofperishable food items, even as monthly prices registered a drop. The StateBank of Pakistan has maintained that inflation has remained within its 5-7percent target range from July to November, although core inflationcontinues to exhibit stickiness. This controlled price environment,combined with anchored expectations, provides the central bank with greaterflexibility to prioritize growth support without immediately reignitinginflationary pressures.
Foreign exchange reserves have shown incremental improvement, reinforcingthe case for monetary accommodation. Data from the State Bank indicate thatreserves held by the institution rose modestly by 16 million dollars to16.09 billion dollars for the week ending January 16. Total liquidreserves, including those of commercial banks at 5.17 billion dollars,reached approximately 21.26 billion dollars. These levels, while not athistoric highs, represent a stabilization that mitigates externalvulnerabilities and supports confidence in the balance of payments outlookamid ongoing remittance inflows and multilateral disbursements.
The Pakistani rupee has demonstrated notable stability against the USdollar, trading in a narrow band around 279-280 in recent sessions. Thissteadiness contrasts with past volatility and stems from improved externalaccounts, including better-than-expected remittances and controlled importdemand. A stable currency reduces imported inflation risks and allows thecentral bank to ease without fears of sharp depreciation that couldundermine disinflation efforts or debt servicing costs.
Cumulative rate reductions since mid-2024 have already amounted to 1,150basis points, marking a significant reversal from the aggressive hikingcycle implemented to combat double-digit inflation peaks. This easing hasaimed to stimulate economic activity, particularly in large-scalemanufacturing and agriculture, where early indicators suggest positivemomentum. However, analysts emphasize the need for prudence, citingpotential upside risks from seasonal factors, geopolitical developments,and sticky core prices that could prompt temporary inflation upticks towardthe fiscal year’s end.
Market participants view the anticipated cut as supportive of broaderrecovery objectives, including enhanced private sector credit growth andinvestment. Lower borrowing costs could alleviate pressure on businessesand households, fostering consumption and industrial output in an economynavigating post-crisis adjustments. Nevertheless, the central bank islikely to reiterate a data-dependent approach, balancing growth imperativesagainst the imperative of preserving hard-won price stability gains.
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The upcoming decision arrives against a backdrop of sustained IMFengagement, which has underscored the importance of cautious policycalibration to safeguard fiscal and external buffers. While easing supportssustainable expansion, premature or excessive cuts risk reversingdisinflation progress or straining reserves if global conditionsdeteriorate. Analysts remain divided on the pace, with some favoring boldersteps toward single digits based on current trends.
Overall, the consensus leans toward measured easing that aligns withimproving fundamentals, positioning Pakistan for gradual normalization ofmonetary conditions. This trajectory reflects resilience in key indicatorsand cautious confidence in the outlook, even as risks warrant vigilance inthe months ahead.
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