The State Bank of Pakistan (SBP) announced on Monday a 100 basis points (bps) reduction in its key policy rate, bringing it down to 12% from 13%. This marks the sixth rate cut since June 2024, with the central bank slashing a total of 1,000bps from the policy rate during this period.

The decision, made during the Monetary Policy Committee (MPC) meeting, reflects the central bank’s cautious optimism regarding inflation and economic stability. SBP Governor Jameel Ahmed, addressing a press conference, stated that the rate cut was driven by improving inflationary trends and positive developments in remittances and exports.

Governor SBP noted that inflation figures are expected to decline in the coming months, though core inflation remains elevated. “Keeping these factors in mind, we adopted a cautious approach,” he said. The governor also highlighted encouraging trends in remittances and export performance, which are helping to stabilize the current account.

The government’s recent reduction in cut-off yields on treasury bills (T-bills) further signaled the likelihood of a rate cut. At last week’s auction, T-bill rates were reduced by up to 41bps, with the return on a 12-month tenor dropping to 11.38%. This followed a 49bps reduction earlier in January, bringing the total cut for the month to 90bps.

Financial analysts widely anticipated the 100bps rate cut, given the improving inflation outlook and the government’s fiscal measures. The reduction in the policy rate is expected to support economic growth by lowering borrowing costs for businesses and consumers.

The SBP’s policy rate has been on a downward trajectory since June 2024, when it stood at 22%. The latest cut brings the rate to its lowest level in over a year, signaling the central bank’s confidence in the country’s economic recovery.