In its latest monetary policy meeting held on March 10, 2025, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) opted to maintain the policy rate at 12 percent, reflecting a measured approach toward macroeconomic stability. The decision comes amid a complex mix of easing inflationary pressures, persistent core inflation, improving domestic economic activity, and emerging external sector risks.
The MPC noted that inflation in February 2025 was lower than earlier projections, primarily due to a drop in food and energy prices. However, despite the favorable decline, the Committee highlighted the continued volatility of these prices, cautioning that any rebound in food and energy costs could disrupt the downward inflation trend. Additionally, core inflation remains sticky at elevated levels, making the case for caution even stronger.
On the domestic front, the MPC acknowledged that economic activity has been gaining momentum. This observation is supported by recent high-frequency indicators that signal a pickup in overall demand and production. Nevertheless, the Committee pointed out that external sector vulnerabilities are surfacing again. Notably, a rise in imports, set against subdued financial inflows, is beginning to exert pressure on the current account and foreign exchange reserves.
The MPC provided an overview of significant economic developments since its last meeting. The current account, which had been in surplus in preceding months, posted a deficit of $0.4 billion in January 2025. This shift, combined with sluggish foreign financial inflows and ongoing debt repayments, led to a decline in the SBP’s foreign exchange reserves. Meanwhile, large-scale manufacturing (LSM) output showed mixed trends, with a notable month-on-month increase of 19.1 percent in December 2024, but an overall decline in the first half of the fiscal year (H1-FY25).
Fiscal performance also raised concerns, with a widening shortfall in tax revenues in both January and February 2025. On the brighter side, consumer and business confidence have shown signs of improvement in recent surveys, indicating a cautiously optimistic outlook among key economic stakeholders.
Globally, the environment has become increasingly uncertain. Escalating trade tariffs and global geopolitical tensions are clouding prospects for international trade, commodity prices, and economic growth. These external uncertainties have influenced central banks in both advanced and emerging economies to slow the pace of monetary easing, underscoring a more conservative policy stance worldwide.
Given the above dynamics, the MPC reiterated its view that the current real interest rate remains adequately positive on a forward-looking basis, supporting the goal of macroeconomic stability. The Committee also emphasized that the full impact of previous rate cuts is still unfolding and should be allowed to permeate the economy before considering further adjustments.
In conclusion, the MPC maintained its cautious tone, underscoring the importance of keeping monetary policy aligned with inflationary trends. The Committee reaffirmed its commitment to anchoring inflation within the medium-term target range of 5 to 7 percent. It also stressed the need for complementary structural reforms to foster sustained and inclusive economic growth in Pakistan.