KARACHI: The State Bank of Pakistan (SBP) has announced to maintain the benchmark interest rate at 11 per cent.
The decision was taken during a meeting of the Monetary Policy Committee chaired by SBP Governor Jameel Ahmed.
It is worth noting that Governor Jameel Ahmed had earlier indicated that a rate cut was unlikely, citing uncertainty over inflation trends and ongoing negotiations with the International Monetary Fund (IMF) as key factors influencing the decision.
In an interview with Bloomberg, the governor said any change in the policy rate would depend on the outcome of the IMF talks and the economic impact of recent floods.
Ahmed said inflation could temporarily exceed the SBP’s medium-term target range of 5 to 7 per cent in early 2026, though it is expected to average within that band during the current and next fiscal years.
Analysts and independent economists had also ruled out the possibility of a rate cut, noting that rising inflation and the central bank’s cautious stance reflect a focus on overall economic stability rather than short-term growth. Inflation rose from 3 per cent in August to 5.6 per cent in September, largely due to disruptions caused by recent floods.
Earlier on September 15, the SBP had kept its benchmark policy rate unchanged at 11 percent.
Monetary policy involves central banks’ use of instruments to influence interest rates and/or money supply in the economy with the objective to keep overall prices and financial markets stable. Monetary policy is essentially a stabilization or demand management policy that cannot impact long-term growth potential of an economy. Preamble to SBP Act, 1956 envisages monetary policy to secure monetary stability and attain fuller utilization of economy’s productive resources. In SBP’s view, the best way to achieve these objectives on a sustainable basis is to keep inflation low and stable.
Low and stable inflation provides favorable conditions for sustainable growth and employment generation over time. It reduces uncertainties about future prices of goods and services and helps households and businesses to make economically important decisions such as consumption, savings and investments with more confidence. This, in turn, facilitates higher growth and creates employment opportunities over the medium term leading to overall economic well-being in the country.
In practice, SBP’s monetary policy strives to strike a balance among multiple and often competing considerations. These include: controlling inflation, ensuring payment system and financial stability, preserving foreign exchange reserves, and supporting private investment.
How does Monetary Policy Work?
SBP signals its monetary policy stance through adjustments in the policy rate; that is, the SBP Target Rate for the overnight money market repo rate. Changes in the policy rate impact demand in the economy through several channels and with a lag. In the first place, changes in policy rate influence the interest rates determined in the interbank market at which financial institutions lend or borrow from each other. The market interest rates are also influenced by central bank interventions in money and foreign exchange markets as well as by its communication.
The changes in market interest rates influence the borrowing cost for consumers and businesses as well as the return on deposits for the savers. Generally, lower interest rates encourage people to save less and consume/invest more, and vice versa. Changes in the policy rate also influence the value of financial and real assets, impacting people’s wealth and thus their spending. The adjustment in demand finally affects the general price level and thus inflation in the economy.