KARACHI: The State Bank of Pakistan (SBP) announced on Monday that it is keeping the policy rate unchanged at 12 percent, citing an adequately positive real interest rate on a forward-looking basis to sustain macroeconomic stability.
The central bank has slashed the policy rate by 1,000 basis points from 22 percent since June 2024 in six intervals. Despite expectations of a cut, the decision to maintain the rate reflects caution amid inflationary risks.
February inflation stood at a near-decade low of 1.5 percent, largely due to a high base effect from the previous year. A Reuters survey of 14 analysts indicated that most expected further rate cuts, with a median forecast of a 50-basis-point reduction. Of the 10 analysts forecasting a cut, three projected a 100-bps reduction, one expected 75 bps, and six estimated 50 bps. The remaining analysts predicted no change.
SBP’s Rationale for Holding Rates
In its statement, the SBP’s Monetary Policy Committee (MPC) cited lower-than-expected inflation, primarily due to declining food and energy prices. However, it warned of risks from the inherent volatility in these prices.
“Core inflation remains persistently high, and any uptick in food and energy prices could reverse the declining trend,” the statement said.
The SBP also noted an improvement in economic activity, as indicated by high-frequency indicators. However, pressures on the external account have emerged due to rising imports and weak financial inflows.
“The MPC assessed the current real interest rate as adequately positive to sustain macroeconomic stability,” the notification stated.
Economic & Fiscal Indicators
The SBP noted that the current account turned into a deficit of $0.4 billion in January after running a surplus for several months. Weak financial inflows and ongoing debt repayments have also contributed to a decline in foreign exchange reserves.
Large-scale manufacturing (LSM) output fell in the first half of FY25 despite a strong 19.1 percent surge in December 2024. Meanwhile, tax revenue shortfalls widened further in January and February, raising concerns over fiscal targets.
While consumer and business confidence has improved, the global economic outlook remains uncertain due to escalating tariffs and potential impacts on trade and commodity prices. In response, many central banks in advanced and emerging markets have slowed monetary easing.
Growth and Inflation Outlook
The MPC emphasized maintaining a cautious monetary stance to stabilize inflation within its 5-7 percent target range. It noted that economic activity is gaining traction, with rising automobile sales, import volumes, and credit to the private sector.
Although LSM contracted by 1.9 percent in the first half of FY25, the SBP expects economic growth to recover in the latter half, supported by easing financial conditions. The committee maintained its real GDP growth projection, expecting further momentum in the coming months.
On the external front, the current account turned into a deficit in January, reducing the cumulative surplus to $0.7 billion for July-January FY25. Rising import volumes and global commodity prices have driven up import payments, but robust workers’ remittances and moderate export growth have helped offset these pressures.
The SBP reaffirmed its FY25 current account balance projection of a surplus or a deficit of 0.5 percent of GDP and stressed the importance of strengthening external buffers amid global uncertainty.
Fiscal Challenges & Monetary Policy Impact
Fiscal accounts for the first half of FY25 showed an improvement in both overall and primary balances, supported by higher non-tax revenues and controlled expenditures, particularly subsidies. However, the Federal Board of Revenue (FBR) missed tax collection targets in January and February.
The MPC highlighted the need for continued fiscal consolidation and reforms to widen the tax base, emphasizing that fiscal prudence is essential for macroeconomic stability.
Despite broad money growth remaining stable at 11.4 percent year-on-year, the committee observed a shift in net domestic assets (NDA), with increased government borrowing and seasonal net retirement of private sector credit. The latter was expected due to aggressive lending by banks in Q2-FY25 to avoid asset-deposit ratio (ADR) taxation.
Analysts had largely expected a rate cut, with many anticipating the central bank would stop easing once rates reached 10.5-11 percent due to potential inflationary pressures. Inflation is expected to bottom out in Q1 2025 before gradually rising.
Ahmad Mobeen, a senior economist at S&P Global, projected average inflation of 6.1 percent for 2025. “Despite the sharp drop in the Consumer Price Index (CPI), urban core inflation remains high at 7.8 percent, indicating underlying price pressures,” he said.
At its last policy meeting, the SBP maintained its full-year GDP growth forecast of 2.5-3.5 percent, expecting economic activity to bolster foreign exchange reserves. However, Sana Tawfik, head of research at Arif Habib Limited, noted that while GDP grew 0.9 percent in Q1 FY25, LSM remains in negative territory, and industrial production has yet to gain momentum.
“The impact of lower rates on economic activity is still unfolding,” she said, adding that further improvement depends on a recovery in industrial and agricultural output.
