In a move that caught many analysts off guard, the State Bank of Pakistan (SBP) kept its key policy rate unchanged at 11% on July 30, 2025. The central bank’s decision came amid easing inflation and growing calls for further cuts to support economic recovery. However, concerns over energy prices and future inflation risks appear to have tipped the balance.
Inflation Pressures Prompt Caution
Speaking at a press conference in Karachi following the Monetary Policy Committee (MPC) meeting, SBP Governor Jameel Ahmed said inflation had ticked up slightly in May and June. This followed a low point in April and was mainly driven by higher energy costs and the base effect.
He warned that inflation may rise moderately in the coming months due to continued upward pressure on gas and electricity prices. Despite this, the SBP projects inflation to remain within its medium-term target range of 5% to 7%.
External Sector Offers Some Relief
Governor Ahmed highlighted positive developments in the external sector. Worker remittances surged by $8 billion, helping to maintain a current account surplus. Exports also grew by 4%, providing additional stability.
He stated that Pakistan had met all its external debt obligations on time and that foreign exchange reserves had increased by $5 billion, despite $26 billion in payments during the year. SBP’s total reserves now stand above $14 billion.
These developments, according to the SBP, signal improving macroeconomic fundamentals and reduce immediate pressure on the rupee and external accounts.
Agricultural Recovery and Growth Outlook
The governor noted signs of recovery in the agricultural sector, which is expected to support overall economic growth during the current financial year. Still, he acknowledged that growth remains fragile and highly sensitive to global commodity prices.
Meanwhile, the central bank observed that inflation expectations among businesses have declined, though consumer sentiment remains cautious. Energy price volatility and uncertain global trade conditions have also contributed to a wait-and-see approach by central banks worldwide.
Read: PSX Drops Ahead of SBP’s Key Interest Rate Decision
MPC Statement Highlights Mixed Signals
In its post-meeting statement, the MPC said that although economic activity is picking up—partly due to earlier rate cuts—emerging risks justify a pause in further monetary easing.
The Committee acknowledged that inflation outlook had worsened slightly due to a higher-than-anticipated adjustment in energy tariffs, particularly gas prices. However, they maintained that inflation should stabilize within the targeted range moving forward.
The MPC also noted that while economic activity is showing momentum, the trade deficit could widen in the next fiscal year due to increased domestic demand and slower global trade growth.
Need for Structural Reforms
The MPC stressed the need for structural reforms to achieve long-term economic stability. Without these reforms, the Committee warned, it would be difficult for Pakistan to reach higher growth levels on a sustainable basis.
This view aligns with the ongoing $7 billion IMF programme, under which the government has committed to a tight fiscal policy and structural adjustments aimed at reducing deficits and improving governance.
The IMF, in its latest Economic Outlook Update, revised Pakistan’s growth forecast for FY2026 downward to 3.6%, well below the government’s 4.2% target.
Recent Rate Movements
The SBP’s decision to hold rates follows a 100-basis-point cut in May, which resumed the easing cycle after a brief pause in March. Since June 2024, the central bank has reduced the policy rate by a total of 1,100 basis points from a record high of 22%.
The move to maintain rates in July contrasts with market expectations. A Reuters poll of 15 analysts earlier this week showed unanimous anticipation of a cut, with most expecting a 50 to 100 basis-point reduction.
Inflation and Market Sentiment
Headline inflation slowed to 3.2% in June and is projected between 3.5% and 4.5% in July. These figures fall well within the SBP’s inflation target for the current fiscal year. However, the central bank appears more focused on maintaining stability and guarding against potential future shocks than pushing short-term growth.
With global oil prices remaining volatile and metal prices on the rise, the SBP is clearly choosing a cautious stance. Its current strategy aims to preserve price stability, protect foreign reserves, and maintain a real interest rate buffer to anchor inflation expectations.
For now, the message from the SBP is clear: growth will take a backseat unless inflation stays under control and structural issues are addressed.
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