In Pakistan’s challenging economic environment, credibility is a vital currency, and over the past year and a half, the State Bank of Pakistan (SBP) has quietly reinforced its own. Where monetary policy was once perceived as reactive and ineffective, the central bank has increasingly demonstrated that a disciplined, gradual approach can stabilize markets, anchor expectations, and build confidence in the economy.
On October 27, the Monetary Policy Committee (MPC) opted to maintain the policy rate at 11 percent, marking the fourth consecutive hold since May 2025. This followed a series of calibrated adjustments over the prior two years, when the SBP cautiously lowered rates from 22 percent in June 2023 to 11 percent by May 2025. Each step was deliberate, with the SBP resisting calls for aggressive, one-off reductions, thereby preserving market stability.
The impact of this strategy has been visible. The Pakistani rupee remained relatively stable, inflation dipped below 1 percent in April 2025, and consumer confidence surged to 44.6 percent by May—the highest level in four years. While external factors, such as controlled imports, lower economic growth, and favorable oil prices, contributed, the SBP’s measured stance played a pivotal role in sustaining stability.
However, the path ahead is more complex. The low base effect that helped maintain subdued inflation in FY2024 will no longer cushion the economy. Inflation, which averaged 4.5 percent in FY2024, may rise even with modest price increases due to elevated baseline effects. Early signals confirm this trend, with the consumer price index rising to 3.5 percent in May 2025 from 0.3 percent in April.
Simultaneously, Pakistan is pursuing higher growth, projected at 4.2 percent in FY2025–26, while global oil prices and domestic levies, such as the petroleum development levy (PDL) increase from Rs70 to Rs100 per litre, add inflationary pressure. The rupee has already shown vulnerability, dropping from 279 to 283 per dollar between April and June. These developments challenge the SBP’s ability to maintain price stability while supporting growth.
Another concern is the rapid expansion of the money supply. Over the past 12 months, broad money (M3) increased by 14.31 percent, and cash in circulation (M1) grew 15.79 percent, significantly outpacing regional peers. This liquidity surge, coupled with moderate real GDP growth of 2.6 percent, could further exacerbate inflationary pressures, requiring careful monetary calibration.
Credibility is also linked to communication. The SBP has yet to fully implement non-technical, accessible explanations of its monetary policy decisions, which could enhance public understanding and improve the transmission of policy actions. Experts recommend systematic media engagement, digital outreach, and the use of artificial intelligence tools for simplifying complex reports and analyzing market sentiment, following practices adopted by several global central banks.
Finally, the SBP must address perceptions that its policies are unduly influenced by IMF conditions, which could undermine its independence. Transparent communication, strategic use of digital platforms, and clear policy rationales will be essential to sustaining credibility while navigating inflationary pressures, growth aspirations, and external obligations.
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