Pakistan’s banking sector witnessed a notable adjustment in August 2025, as both deposit and lending rates declined further in line with the broader monetary easing cycle. The movement in interest rates has reshaped the returns environment for depositors while slightly improving spreads for banks, marking an important phase in the country’s financial system.
According to newly released official data, the weighted average return on bank deposits fell sharply during the month. Deposit rates dropped by 58 basis points, settling at 5.32 percent in August compared to 5.91 percent in July. On a year-on-year basis, the decline was far steeper, with the weighted average deposit rate contracting by 1,344 basis points from 18.76 percent recorded in August 2024. This steep fall highlights the impact of continued monetary relaxation and reduced policy rates over the past year.
Lending rates also followed a downward trajectory, though the pace of decline was more measured compared to deposits. The weighted average lending rate across scheduled banks slipped by 12 basis points to 11.87 percent in August, from 11.99 percent in July. When compared to the same period last year, lending rates showed a decline of 717 basis points, signaling a significant softening of borrowing costs for businesses and individuals.
While depositors are facing reduced returns, banks have experienced some margin relief as the difference between lending and deposit rates widened. The sector’s spread increased to 655 basis points in August, up from 608 basis points in July. This rise reflects improved profitability for banks, even as depositors adjust to lower savings returns in a changing rate environment.
In terms of inflation-adjusted returns, or real rates, the banking sector displayed a mixed picture. The real deposit rate declined slightly to 1.89 percent in August, down from 1.96 percent in July. On the other hand, the real lending rate strengthened to 8.44 percent compared to 8.04 percent in the previous month. These changes suggest that while depositors saw reduced incentives to save, borrowers continued to face relatively high real borrowing costs.
Financial analysts note that the current monetary easing cycle has created both challenges and opportunities for Pakistan’s banking ecosystem. Lower deposit rates may deter savings growth, particularly among small depositors, while declining lending rates are expected to stimulate credit demand, especially in sectors reliant on working capital financing. For banks, the widening spread offers short-term relief in margins, but sustainability will depend on credit growth and asset quality trends over the coming quarters.
As the State Bank of Pakistan continues to navigate its monetary policy path, the banking sector remains in transition. Market participants are watching closely to assess how declining rates influence consumption, investment, and overall economic momentum in the months ahead. The recalibration of returns across deposits and lending highlights the delicate balance between monetary easing, banking sector health, and broader economic stability.
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