The State Bank of Pakistan (SBP) has chosen to keep its policy rate locked at 12%, a move that reflects cautious optimism about the country’s economic path.
After slashing rates by a bold 1,000 basis points since June 2024, the central bank is now pausing to breathe, citing a “just right” real interest rate to cradle the budding macroeconomic stability. With inflation dipping to a near-decade low of 1.5% in February, thanks to softer food and energy prices, the SBP isn’t ready to celebrate yet—core inflation’s stubborn streak and a wobbly external account are keeping it on its toes.
The SBP has opted to hold its policy rate steady at 12%, a decision rooted in its belief that the current real interest rate strikes the right balance to nurture the country’s fragile economic stability moving forward. This comes after a series of aggressive cuts totaling 1,000 basis points since June 2024, when the rate sat at a hefty 22%. Inflation in February hit a near-decade low of 1.5%, thanks largely to a steep drop from last year’s high base, driven by softer food and energy costs. Yet, the central bank isn’t celebrating just yet—experts were whispering about a possible 50-basis-point trim down the road.
In a statement, the SBP’s Monetary Policy Committee (MPC) explained its choice to keep the rate at 12%. Inflation surprised on the downside in February, but the committee isn’t letting its guard down. “Even with this dip, we’re mindful of how unpredictable food and energy prices can be,” the statement hinted, pointing to their potential to derail the downward inflation trend. Core inflation, meanwhile, remains stubbornly high, refusing to budge as much as headline figures. The MPC worries that any sudden spike in essentials like groceries or fuel could reignite inflationary pressures.
On the flip side, the economy is showing signs of life. “We’re seeing more hustle and bustle out there,” the statement noted, nodding to upbeat high-frequency data like rising imports and bustling urban activity. But this pickup comes with a catch—imports are climbing while foreign cash inflows stay sluggish, putting a strain on the external account. Still, the MPC feels the current rate is “just right” to keep things humming without tipping the scales toward instability. They also stressed that the government needs to keep tightening its belt—think broader taxes and smarter spending—to back up these efforts.
Despite inflation’s nosedive, the SBP isn’t ready to ease up. Why? The balance of payments is looking wobbly. Foreign exchange reserves, which clawed their way from a measly $3 billion in early 2023 to $12 billion by November 2024, have slipped by $800 million in the past two months. That’s a red flag for a central bank laser-focused on price stability, aiming to keep inflation in its sweet spot of 5-7% over the medium term. Without a solid external buffer, the rupee could take a wild ride, and inflation might spiral out of control.
The SBP’s journey over the past year has been a rollercoaster. When reserves were rock-bottom and inflation was sky-high in 2023, the bank held firm. As reserves rebuilt and inflation cooled—helped by a rare fiscal surplus—it slashed rates boldly. Now, with reserves dipping and core inflation refusing to play ball, it’s hitting pause. “Volatility in food and energy is the wild card here,” the statement seemed to sigh. February’s 1.5% inflation was a win, mostly thanks to cheaper perishables, but if those prices bounce back, trouble could brew.
Meanwhile, the economy’s pulse is quickening. Urban air is buzzing with more NO2, a sign of revved-up activity, imports are up, and businesses and consumers are starting to loosen their purse strings after those 1,000 basis points of relief. Companies are eyeing upgrades, and folks are splurging a bit more. That’s great—until it pressures imports and inflation. The SBP’s steady hand aims to temper this enthusiasm just enough.
Looking ahead, the bank’s got its eyes peeled. The fiscal picture is murky—tax collection’s lagging, and hitting surplus targets feels like a stretch. Talks with the IMF about next year’s budget are simmering, and the SBP wants a clear view before making its next move. By June, the dust should settle: demand trends will sharpen, the budget will take shape, and global ripples—like the U.S.’s tariff tango—will be clearer. If reserves climb past $13 billion, maybe with an IMF nod and a credit rating boost, a rate cut or two in early 2026 could be on the table—especially if a U.S. slowdown eases external heat. For now, though, the SBP’s playing it cool, balancing a budding recovery with the ghosts of inflation past.
For now, the State Bank of Pakistan is holding the line at 12%, a pragmatic stance that mirrors its delicate dance between fostering growth and taming risks. With economic activity flickering to life and inflation at its lowest in years, the temptation to ease further is there—but dwindling reserves and sticky core inflation have slammed on the brakes. The months ahead will be telling: a clearer fiscal outlook, global trade shifts, and the fate of foreign inflows will shape the SBP’s next steps. If reserves rebound and external pressures soften, a cut could beckon in 2026. Until then, it’s a watchful wait, as the central bank guards its hard-won stability with a steady hand.