Pakistan: SBP lowers interest rate by 100bps

After keeping the rates unchanged in March’s monetary policy, the State Bank of Pakistan (SBP) has cut the policy rate by 100bps to 11.0%. The policy rate has halved in less than a year, down from 22.0% in June 2024. Intermarket Securities believes the key reasons behind the rate cut are:

Headline CPI coming off to multi-decade low in April, with core inflation dipping to 8.0%YoY, resulting in an improved inflation outlook. 

Weak LSM readings feeding into anemic GDP growth of just 1.5%YoY in 1HFY25 (FY25 GDP growth is projected to be sluggish between 2.5% to 3.5%. The shortfall in tax collection has also widened.

Much talked about buildup in foreign exchange reserves to US$14 billion by June 2025, together with expected continued reserves buildup in FY26 even if the current account slips back into a modest deficit. 

Outlook for softer global growth, backed by recent IMF estimate downgrades and sharply lower oil prices.  

The brokerage house believes equities should find something to cheer after the rate cut, having suffered a difficult April, KSE-100 index shed 5.5% on Pakistan-India tensions. That said, given the pace of monetary easing in the previous twelve months, the brokerage house believes the SBP is likely to take a more cautious approach going forward.

With macroeconomic stabilization having been achieved, fiscal reforms remain important for lengthening the economic cycle. The coming Budget, expected in early June, will be a key checkpoint in this respect.

The brokerage house continues to remain positive on Pakistan equities. Its base-case KSE-100 Index target for end December 2025 is 130,000 points.