SBP Interest Rate Cut 2025: What This Means for Pakistan’s Economy
February 21, 2025
Pakistan’s recent economic history shows remarkable changes in SBP interest rates, which dropped by 1,000 basis points within six months. The country’s inflation rate tells an equally compelling story. It fell from 40% in May 2023 to a six-year low of 4.1% in December 2024.
The State Bank of Pakistan has cut rates aggressively to 12% in January 2025. Yet economic growth remains a challenge. GDP growth projections range between 2.5%-3.5% for the fiscal year ending June 2025. The money supply has decreased by Rs973 billion from July 2024 to January 2025.
These interest rate changes continue to alter Pakistan’s economic map. Let’s get into how they affect different sectors and what they mean for the country’s financial future.
1. Recent SBP Interest Rate Changes
Pakistan’s monetary landscape has changed since June 2024. The State Bank of Pakistan (SBP) has systematically reduced interest rates.
From 22% to 12%: The Experience
The SBP has cut rates six times in a row since June 2024. The policy rate dropped from its peak of 22% to 12%. This is a big deal as it means that the cuts exceeded other emerging markets. The reduction was even larger than the 625 basis points cut during the COVID-19 pandemic.
Here’s how the rate cuts happened:
- June 2024 saw the first drop from 22%
- Two more cuts followed in the next months
- December brought the rate down to 13%
- Another 100 basis points went down after that
- The rate finally reached 12% in January 2025
Key factors behind the cuts
The sharp drop in inflation led to these policy changes. December’s inflation fell to 4.1% year-on-year, much lower than what the SBP expected. The central bank now expects inflation to stay between 5.5% and 7.5% for FY25.
The economy showed other positive signs too. The SBP saw better sales in automobiles, fertilizers, and petroleum products. On top of that, Pakistan’s external sector improved with a PKR 166609.03 million current account surplus in December 2024.
The SBP’s policy changes affect the economy through different channels. Policy rate changes influence interbank market rates and affect borrowing costs for consumers and businesses. The central bank keeps a 250 basis points corridor to make its monetary policy work. The ceiling rate stays at 13% while the floor rate remains at 11%.
2. Impact on Pakistan's Banking Sector
Pakistan’s banking sector showed remarkable strength as interest rates kept changing. The sector grew by 11.5% in the first half of 2024. Investment activities, not traditional lending, pushed this growth.
Changes in lending patterns
Banks have changed how they lend money. Private sector advances fell by 0.6%, while public sector advances grew by 3.9%. Traditional banks saw Rs7 billion withdrawn between July and February 2024. This was quite different from last year when they lent Rs492.4 billion.
Islamic banks did better with their lending:
- Islamic branches lent Rs36 billion
- Full Islamic banks added Rs67.8 billion
- They now own 18.7% of all banking assets
Bank profitability outlook
Bank profits reached new heights. Listed banks made Rs572 billion in net profits during 2023, an 86% jump. The sector looks stronger now, and Moody’s changed Pakistan’s banking outlook from negative to stable.
Banks spent more because of inflation and new branches. Their tax payments rose to 52.2% of profit before tax, which cut into their earnings. Banks should keep making good money through 2024, with earnings expected to grow by 12%.
Consumer credit growth
Consumer loans faced tough times and dropped by Rs15.8 billion in 2024’s first half. Car loans fell sharply because interest rates were too high. People borrowed Rs22 billion less for personal use in 2023. This shows how tight money was for households.
The farming sector did better though. Farm loans went up by Rs25.4 billion. The Farm Mechanization Scheme and Prime Minister’s Youth Business & Agriculture Loan Scheme helped make this happen.
3. Effects on Business and Industry
Pakistan’s industrial activity shows signs of revival after the State Bank’s interest rate cuts. The manufacturing sector’s decline has improved substantially from 4.43% in early 2024 to just 1.03% in Q1-FY2025.
Manufacturing sector response
The textile industry contributes 18.2% to large-scale manufacturing output and has made an impressive comeback. The sector grew 2.3% in July-November FY2025, recovering from a sharp 12.7% decline in FY2024.
The automobile sector emerges as a remarkable success story. Vehicle production and sales soared by 28.3% and 28.2% respectively during July-December FY2025. The cement industry presents mixed results – domestic dispatches fell 10.4% to 18.1 million tons, while exports rose substantially by 31.7% to 4.8 million tons.
Small business benefits
The State Bank has launched several schemes to support small and medium enterprises:
- Risk Coverage Scheme for SMEs
- Prime Minister’s Youth Business and Agriculture Loan Scheme
- SME Asaan Finance Scheme
These programs want to ensure adequate financing at competitive rates. The SBP has created specialized credit guarantee schemes that encourage banks to extend financial services to small enterprises. Business leaders say these measures combined with lower interest rates have started helping SMEs, which serve as the national economy’s backbone.
Industry representatives believe reduced borrowing costs will help local manufacturers compete better in international markets. The textile machinery and construction sectors show positive trends, demonstrating the industry’s steadfast dedication to expanding production capacity.
4. Economic Recovery Signs
Recent economic indicators show a positive outlook for Pakistan’s recovery as the State Bank’s monetary policy changes yield results.
GDP growth indicators
Pakistan’s economy grew by 2.5% in FY2024 after contracting the previous year. The first quarter of FY2025 showed 0.9% growth, which we achieved through 1.15% growth in agriculture and 1.43% growth in services. The future looks promising with IMF projections indicating 3.2% growth for 2025 and 4% by 2026.
Export sector performance
The external sector shows significant improvement. The current account posted a surplus of PKR 335.99 billion in July-December FY2025. This positive change results from:
- Record-high remittance inflows with 32.8% growth
- Strong export performance in high-value-added textiles
- Improved trade balance with reduced imports
Investment trends
Foreign Direct Investment gained momentum and reached PKR 369.04 billion in July-December FY2025, showing a substantial 20% increase from the previous year. The investment-to-GDP ratio will likely rise from 13.14% in 2024 to 16.44% by 2029.
The services sector maintains strong performance with an 8.3% growth in trade volume during July-December FY2025. Some challenges remain as the industrial sector contracted by 1.7% in FY2024. The automobile industry stands out as a bright spot – total vehicle production increased by 28.3% while sales grew by 28.2% compared to the same period in FY2024.
5. Conclusion
Pakistan’s economy shows a notable transformation due to SBP’s bold monetary policy decisions. The journey began with high interest rates at 22%, but systematic rate cuts have created positive effects in sectors of all sizes. Banks show strong resilience while manufacturing industries now display signs of revival.
Inflation has dropped sharply to 4.1%, which proves these monetary policy adjustments work well. Economic recovery looks promising with GDP growth projections of 3.2% for 2025 and 4% by 2026. The export sector performs exceptionally well, and record-high remittance inflows strengthen this positive outlook.
Some challenges still exist. Small businesses need more support, and some industrial sectors struggle with lower demand. The next few months will be significant to see if these interest rate cuts can continue their positive effect on economic growth while keeping inflation under control.
FAQs
The State Bank of Pakistan has reduced the policy rate to 12 percent, effective from January 28, 2025. This represents a significant cut from previous rates and is part of a series of reductions aimed at stimulating economic growth.
Interest rate changes significantly affect economic growth in Pakistan. Lower rates generally make borrowing more affordable for businesses, potentially increasing investment and economic activity. However, high rates can lead to decreased business investment and slower economic growth, particularly affecting small businesses.
Pakistan’s economic outlook for 2025 is cautiously optimistic. GDP growth is projected to be between 2.5% and 3.5%, with improvements expected in various sectors including agriculture, services, and manufacturing. The IMF forecasts a 3.2% growth for 2025, indicating a gradual economic recovery.
The banking sector has shown resilience amid changing interest rates. While private sector lending has slightly contracted, Islamic banks have maintained stronger lending momentum. The sector has seen improved profitability, with Moody’s upgrading Pakistan’s banking sector outlook from negative to stable.
The manufacturing sector has shown signs of revival following interest rate cuts. After initial contraction, the decline has slowed significantly. Notably, the textile industry has bounced back with 2.3% growth, and the automobile sector has seen substantial increases in production and sales, indicating positive responses to the lowered interest rates.