The State Bank of Pakistan (SBP) announced on Monday that it had decided to cut its key policy rate by 100 basis points (bps) to 12 per cent from 13pc amid demands for a major rate cut.

The central bank’s policy rate, after being slashed by 1,000bps from 22pc since June 2024 in six intervals, now stands at 12pc.

In a press conference, SBP Governor Jameel Ahmed announced that the Monetary Policy Committee (MPC), in its meeting today, had decided on the interest rate cut keeping the inflation outlook and other developments in mind.

Furthermore, the central bank chief noted a positive trend in remittances. He also highlighted that inflation numbers were also bound to come down in January, however, he warned that core inflation still remained high.

“Keeping these things in mind, we adopted a cautious approach,” he said, adding that the trend in remittances was “good” and so were export numbers, keeping the current account in view.

Regarding foreign exchange (FX) reserves, the governor said that the central bank maintained its outlook of achieving its goal of $13 billion in FX reserves by the end of June.

A statement released later by the SBP said, “The committee noted that inflation continued to trend downward in line with expectations, reaching 4.1pc y/y [year-on-year] in December.

“This trend is driven by moderate domestic demand conditions and supportive supply-side dynamics, amidst favourable base effect,” it highlighted, adding that inflation was “expected to come down further in January before inching up in the subsequent months”.

Furthermore, the committee also stressed that core inflation remained elevated.

“At the same time, high frequency indicators continued to show gradual improvement in economic activity,” the statement read.

In its key developments, the MPC highlighted that the real GDP growth had turned out lower than the committee’s expectations.

“Second, the current account remained in surplus in December 2024, though the SBP’s FX reserves declined amidst low financial inflows and high debt repayments,” it said.

Thirdly, it noted that despite “a substantial increase in December, tax revenues remained below target”.

“Fourth, global oil prices have exhibited heightened volatility over the past few weeks,” it noted.

Considering these developments and evolving risks, the committee “viewed that a cautious monetary policy stance is needed to ensure price stability”.

Meanwhile, the government had slashed the cut-off yields on treasury bills (T-bills) at the auction last week, which reflected a higher possibility of ano­t­her interest rate.

T-bill rates were cut by up to 41 basis points as the government raised the amount within the auction target. The return on a 12-month tenor was redu­ced by 41bps to 11.38pc compared to 49bps at the auction held on Jan 8, making the total reduction of 90bps this month.

Most financial experts and analysts had believed that the SBP would cut the interest rate by 100bps in its MPC meeting today.