State Bank of Pakistan Keeps Interest Rate Unchanged at 12%

The State Bank of Pakistan (SBP) announced on Monday that it has decided to keep the policy rate steady at 12%, citing inflationary trends and the external account’s position as key considerations in its decision-making process.

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) highlighted in its monetary policy statement that headline inflation dropped to 1.5% in February 2025, driven by a decline in food and energy prices alongside favorable supply-side conditions. However, the committee noted that core inflation remains persistently high, and a potential uptick in food and energy prices could lead to renewed inflationary pressures.

The Monetary Policy Committee (MPC) observed that inflation expectations among consumers and businesses present a mixed picture. Additionally, the latest high-frequency economic indicators suggest that economic activity continues to strengthen. However, the MPC highlighted emerging pressures on the external account, driven by rising imports and subdued financial inflows.

In view of these developments, the Committee assessed inflation to come down further before gradually inching up and stabilizing within the target range of 5 to 7 percent, “however this inflation outlook was susceptible to risks emanating mainly from volatility in food prices, timing and magnitude of energy price adjustments, additional revenue measures, protectionist policies in major economies and uncertain outlook of global commodity prices.”

The MPC noted key developments since its last meeting including the current account deficit in January 2025, decline in SBP’s foreign reserves due to weak financial inflows and ongoing debt repayments, decrease in half yearly large-scale manufacturing output, shortfall in tax revenues, as well as improvement in both consumer and business sentiments.

On the global front, the committee observed, uncertainty has increased significantly amidst the ongoing tariff escalations, which may have implications for global economic growth, trade and commodity prices. In response to these developments, central banks in advanced and emerging economies have recently slowed the pace of their monetary easing.

On balance, the MPC was of the opinion that current real interest rate will be adequately positive on a forward-looking basis to sustain the ongoing macroeconomic stability. The MPC also reiterated the importance of maintaining a cautious monetary policy stance to stabilize inflation within the target range of 5 to 7 percent along with structural reforms, which are essential to achieve sustainable economic growth.

The Committee reviewed high-frequency indicators in the real sector, including sales of automobiles, POL products and cement, as well as import volumes, credit to private sector, and purchasing managers’ index, which show that economic activity is gaining further traction. Moreover, latest pulse surveys show improved consumer and business confidence.

The Committee noted that the LSM output indicator contracted by 1.9 percent in H1-FY25 despite the positive momentum in key sub-sectors like textiles, pharmaceuticals, automobiles and POL.

At the same time, in the agriculture sector, latest information, including satellite imagery, indicates subsiding of downside risks to Rabi crops after the recent rainfalls. The MPC expects economic growth to recover in H2-FY25 on the back of easing financial conditions.

On balance, the Committee maintains its earlier real GDP growth projection of 2.5 to 3.5 percent for FY25, and expects economic activity to gain further momentum going forward.

The MPC stated that the current account, led by a broad-based acceleration in imports and higher commodity prices, turned into a deficit in January 2025 while the cumulative surplus remained $0.7 billion during July-January FY25.

The MPC assessed that these developments are broadly in line with its expectation, and reaffirmed the FY25 current account balance projection of a surplus and a deficit of 0.5 percent of GDP.

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The Committee observed that despite weak net financial inflows, the majority of debt repayments for the year have already been made. “With lower debt repayments and expected realization of planned official inflows in the remaining months of FY25, the SBP’s FX reserves are likely to reach above $13 billion by June 2025,” the MPC noted and emphasized the importance of strengthening external buffers in the presence of heightened global economic uncertainty.

The fiscal accounts for H1-FY25 indicate an improvement in both the overall and primary balance on the back of a sizable rise in revenues, particularly non-tax revenues, as well as contained expenditures, mainly subsidies, the MPC noted.

The Committee assessed that the fiscal cushion created through contained current expenditures and expected decline in interest payments may keep the overall fiscal balance close to the target for FY25.

The committee termed primary balance targets as challenging and emphasized the importance of the continued fiscal consolidation to support macroeconomic stability and reiterated the need for fiscal reforms targeted at widening the tax base.

The committee further noted that the broad money (M2) growth remained unchanged while a compositional shift was observed in the NDA, as the government’s borrowing from the banking system rebounded and private sector credit (PSC) showed greater than seasonal net retirement. The latter was anticipated given the aggressive lending by banks during Q2-FY25 to avoid ADR-related taxation, it added.

However, the MPC noticed that PSC growth, at 9.4 percent, is still significant, reflecting the impact of the ease in financial conditions and ongoing economic recovery. On the liability side, the growth of the currency in circulation increased, while deposit growth further decelerated since the last MPC.