KARACHI: Contrary to the widely held expectations of a rate cut by 50-100 bps, the State Bank of Pakistan’s Monetary Policy Committee kept the policy rate unchanged at 12 per cent on Monday, pausing the rate reduction streak by 1,000 basis points from 22 per cent since June 2024.
The committee noted that inflation in February 2025 turned out to be lower than expected, mainly due to a drop in food and energy prices. “Notwithstanding this decline, the Committee assessed the risks posed by the inherent volatility in these prices to the current declining trend in inflation,” the central bank said in a statement.
Meanwhile, economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators. However, the MPC viewed that some pressures on the external account have emerged due to rising imports amidst weak financial inflows, the statement added.
With this stance, the central bank has broken its streak of six consecutive cuts in the monetary policy easing cycle by observing the status quo.
“The primary reason behind keeping the rate unchanged is the pressure on external accounts with weak financial inflows,” Topline Securities note stated.
The real interest rate after this decision now stands at 1050bps based on February 2025 inflation of 1.5 per cent YoY. However, based on our FY26 inflation forecast of 8-9 per cent, the real rates are 300-400 bps, it added.
Among all the analysts and brokerage houses, Topline had predicted a status quo prior to the announcement.
“Weak external flows and higher current account deficit in January 25, has caused SBP to adopt cautious approach. The same had led to a decline in foreign exchange reserves,” Muhammad Awais Ashraf, Head of Research at AKD Securities, told HUM News English.
However, post-IMF review inflows will improve, and the country will be in a better position to have better terms on new commercial borrowing, Ashraf added.
After seven consecutive reduction decisions, the state bank today maintained the rate, maybe because all economic indicators are showing a positive trend, economic activity has been improving tremendously, since our country is a port oriented country there must be an uptick in the import activities, said Salam Ahmed Naqvi, Head of Institutional Sales at Aba Ali Habib.
“Due to the rising exchange rate, SBP has to maintain the policy rate because further a cut could create extra-liquidity that could go into dollarisation which will further increase the exchange rate resulting in the negative impact on the economy,” Naqvi told HUM News English.
The central bank reviews numerous factors for deciding on policy rate. Besides inflation, it assesses various other factors, namely external accounts, reserves level, exchange rate amongst others to decide on policy rate.
“The decision reflects concerns over inflation risks, particularly from volatile food and energy prices, even as headline inflation declined,” Saad Hanif, analyst at Ismail Iqbal Securities, told HUM News English.
Additionally, core inflation remains persistently high, while external account pressures have risen due to weak financial inflows and increasing imports. The MPC views the current real interest rate as sufficiently positive to support macroeconomic stability, prioritising a cautious stance amid global uncertainties and domestic fiscal challenges, Hanif went on to add.
The MPC’s decision to maintain the status quo is primarily driven by higher core inflation and expected volatility in food and energy prices, despite a sharp decline in inflation, stated Sherman Securities.