Inflation in Pakistan Reaches Lowest Level in a Decade, Raising Pressure on State Bank to Cut Interest Rates

ISLAMABAD:According to the Pakistan Bureau of Statistics, inflation in the country has reached its lowest level in the past decade, with the inflation rate standing at 2.4% in January 2025. This decline has increased pressure on the State Bank to reduce the policy interest rate to single digits.

The statistics department reported that inflation in January 2025 was 2.4% higher compared to January 2024, marking the lowest rate of inflation since November 2015 when inflation was at 2.7%. As a result, the gap between the key policy rate and inflation has widened to 9.6%. It is worth noting that the State Bank recently reduced the interest rate by 1% to 12%.

Both the government and the State Bank are hesitant to lower interest rates further, citing concerns over the country’s economic vulnerabilities. These economic fault lines are preventing a faster pace of growth.

Experts suggest that unless the interest rate is reduced to a single-digit figure, business activities will not see significant improvement. For the current fiscal year, the government has set an inflation target of 12%, while the International Monetary Fund (IMF) has projected it at 9.5%. However, during the first half of the year, inflation has remained at 6.5%, which is half of the government’s annual target.

Core inflation, which excludes energy and food items, has also decreased. In urban areas, it has dropped to 7.8%, while in rural areas, it has reduced to 10.4%. The average core inflation rate is nearly 3% lower than the policy rate, offering the central bank room to reduce rates further.