In its latest meeting held on March 10, 2025, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided to keep the policy rate unchanged at 12 percent. This decision comes after an aggressive monetary easing cycle that saw a cumulative 1000 basis points (bps) reduction in the policy rate since June 2024. The committee’s decision reflects a cautious approach due to the persistence of elevated core inflation and potential inflationary risks stemming from rising food and energy prices.
According to the MPC, although headline inflation has moderated in recent months, core inflation remains stubborn and does not yet reflect a broad-based softening in prices. The committee also highlighted the risk of renewed pressure on the external account, particularly due to the rising trend in imports. These developments suggest that further monetary easing could jeopardize macroeconomic stability if undertaken prematurely.
Money supply (M2) data further supports this cautious stance. From July 1, 2024, to February 28, 2025, the overall M2 exhibited a contraction of 0.4 percent, equating to a decrease of Rs. 125.4 billion. This contrasts sharply with the 3.7 percent growth (Rs. 1,152.7 billion) recorded in the same period of the previous fiscal year. A closer look at the components of M2 reveals that Net Foreign Assets (NFA) of the banking system rose by Rs. 771.2 billion, a notable improvement from the Rs. 545.2 billion increase seen last year. On the other hand, Net Domestic Assets (NDA) declined by Rs. 896.6 billion, a sharp reversal compared to the Rs. 607.5 billion increase reported in the corresponding period of FY2024.
Under budgetary borrowing, the federal government borrowed a modest Rs. 22.3 billion, a dramatic drop from the Rs. 3,369.6 billion borrowed during the same period last year. This indicates a marked reduction in the government’s reliance on domestic banking channels for deficit financing, which may be attributable to better revenue performance or external financing inflows. Meanwhile, the private sector exhibited increased credit demand, borrowing Rs. 573.6 billion, more than double the Rs. 277.5 billion borrowed in the same timeframe last fiscal year. This surge signals improving business sentiment and rising investment activity in the economy.
On the capital markets front, the Pakistan Stock Exchange (PSX) remained relatively buoyant despite volatility. The benchmark KSE-100 index closed at 113,252 points as of February 28, 2025, reflecting a continued trend of positive investor sentiment. Although the index experienced fluctuations throughout the month, the overall market performance was favorable, especially when compared to major global indices facing geopolitical and monetary tightening pressures. The PSX’s total market capitalization at month-end stood at Rs. 13,981 billion, further indicating robust investor confidence and institutional participation.
The confluence of a stable policy rate, improving foreign asset position, controlled government borrowing, and positive stock market performance points to a favorable monetary environment. However, the MPC has signaled that inflation dynamics and external account pressures will remain under close watch before any further adjustments in monetary policy are made. The State Bank’s prudent stance highlights its commitment to preserving macroeconomic stability while supporting sustainable growth through calibrated policy decisions.