In a surprise move, the State Bank of Pakistan (SBP) decided to maintain its policy rate at 11%, stepping back from market predictions of a 50–100 basis point reduction. The decision marks the second consecutive hold at this level, following rate cuts from 22% in June 2024 down to 11%.

Key Considerations:

  • June inflation slowed to 3.2% YoY, with core inflation easing modestly, yet energy price hikes, especially gas tariffs, have worsened the outlook.
  • The SBP cited concerns over a widening trade deficit, fragile external balances, fluctuating commodity markets, and potential weather-related shocks.
  • Governor Jameel Ahmad emphasized that the real policy rate must remain “adequately positive” to maintain inflation targets (5–7%) while supporting macroeconomic stability.

Economic Indicators:

  • Foreign exchange reserves surged past $14 billion, aided by remittances and improved current account inflows.
  • Pakistan’s sovereign credit rating upgrade helped lower Eurobond yields and shrink credit default swap spreads internationally.
  • Although inflation expectations rose slightly among consumers, business confidence appears more stable, highlighting cautious optimism.

Expert Reactions:

  • A Reuters poll had shown all surveyed economists expected a rate cut, with a majority calling for 50 bps. Only a few had projected no change.
  • Analysts from Topline Securities and Arif Habib Limited viewed the decision as overly cautious, noting that easing conditions, like moderated inflation and stable reserves, supported room for a cut.
  • Industry circles called the move “conservative,” urging policy rates to fall into single digits to spur job creation, reduce financing costs, and revitalize business activity.

The SBP reiterated that without complementary reforms in taxation, energy policy, and fiscal discipline, economic growth may struggle to gain sustainable momentum.