ISLAMABAD: The State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 12%, defying market expectations for a rate cut. This decision was made during a meeting of the Monetary Policy Committee (MPC), which emphasized the need for caution in the face of evolving economic conditions in Pakistan.
In its statement, the MPC highlighted that the decision to maintain the policy rate at 12% reflects a careful approach to managing Pakistan’s macroeconomic stability. Despite lower-than-expected inflation in February 2025, mainly due to falling food and energy prices, the committee recognized the risks posed by volatile market conditions. Price fluctuations, particularly in food and energy sectors, could disrupt the ongoing reduction in inflation. The SBP remains concerned about the persistence of core inflation, which could undermine overall economic stability.
The MPC noted that while inflation had shown signs of improvement, especially due to favorable supply-side factors such as lower food prices, the situation remains fragile. The committee warned that inflation could increase again if food prices rise or energy costs change due to shifting global commodity prices. Therefore, the MPC opted for a stable policy rate to ensure that inflation remains within the target range of 5-7% while fostering sustainable growth.
The SBP’s decision to maintain the policy rate comes on the heels of its previous move in January 2025, when it reduced the key rate by 100 basis points to 12%. Market analysts had predicted further monetary easing, expecting a 50 to 100 basis point reduction, given the declining inflation trends. However, some experts had already warned that the SBP might decide to hold the rate steady due to external factors such as the ongoing International Monetary Fund (IMF) review and the continued depreciation of the Pakistani rupee.
Many analysts were also concerned about the challenges facing Pakistan’s foreign exchange reserves, which have been under strain due to weak financial inflows and rising imports. The country’s balance of payments situation remains delicate, with foreign reserves showing minimal growth despite efforts to stabilize the economy.
In its review, the MPC pointed out several significant economic developments that could influence future policy decisions. These included a shift in the current account balance, which moved from a surplus of $0.4 billion in December 2024 to a deficit in January 2025. The decline in the country’s foreign exchange reserves was attributed to ongoing debt repayments and the weak financial inflows that have been a concern for several months.
The SBP also highlighted the economic challenges related to the fiscal situation. Despite the fiscal improvement in the first half of FY25, driven by effective management of subsidies and increased non-tax revenues, the Federal Board of Revenue (FBR) continues to face significant tax collection shortfalls, which could hamper government efforts to stabilize the economy.
The committee recognized that despite these challenges, Pakistan’s economic indicators show signs of recovery, with growth expected in the latter half of FY25. The MPC remains hopeful that a rebound in private sector credit, automobile sales, and other high-frequency indicators will support economic growth. However, experts remain divided on the direction of future monetary policy, with some expecting further rate cuts, while others caution against potential inflationary pressures.
Pakistan’s external account and fiscal position continue to face hurdles. The SBP’s foreign exchange reserves stood at $11.25 billion by the end of February 2025, with commercial banks holding $4.62 billion of the total reserves. Rising import volumes, which are in line with the recovery in economic activity, and an uptick in global commodity prices, particularly energy, have contributed to higher import payments. However, strong remittances from workers abroad and moderate export growth have provided some relief to the external account situation.
Despite these challenges, the fiscal outlook for Pakistan has improved moderately due to the authorities’ management of subsidy programs and other expenditure controls. However, the growing tax collection shortfall remains a pressing concern that could undermine efforts to achieve fiscal consolidation.
As the economy stabilizes, the SBP’s focus will remain on managing inflation and ensuring that the country’s fiscal and external accounts remain balanced. The MPC has reaffirmed that it will continue to monitor economic developments closely and adjust its policies as necessary to safeguard economic stability. The committee’s cautious stance on monetary policy highlights the complex nature of Pakistan’s economic recovery, where inflationary pressures, fiscal constraints, and external factors like currency devaluation remain key challenges. The future direction of the SBP’s monetary policy will likely depend on how these issues evolve in the coming months, with experts split on whether further rate cuts are imminent or if the central bank will adopt a more conservative approach to avoid triggering inflationary expectations.