sbp keeps interest rate unchanged after six successive cuts

The State Bank of Pakistan 

The State Bank of Pakistan (SBP) declared on Monday that the interest rate will remain steady at 12 percent.

The State Bank of Pakistan (SBP) shared an official press release following a meeting of its Monetary Policy Committee (MPC). 

In their statement, SBP highlighted that inflation in February 2025 was lower than anticipated, primarily due to decreases in food and energy prices. However, the committee expressed concerns about the potential risks associated with the volatility of these prices, which could impact the ongoing decline in inflation.

Additionally, core inflation remains stubbornly high, suggesting that any rise in food and energy prices could trigger an increase in overall inflation. On a positive note, economic activity appears to be strengthening, as indicated by recent high-frequency economic data.

The MPC also noted emerging pressures on the external account, attributed to rising imports and weak financial inflows. Overall, the committee believes that the current real interest rate is sufficiently positive to support ongoing macroeconomic stability.

Key developments since the last meeting include a shift in the current account to a deficit of $0.4 billion in January 2025, following a period of surplus. This situation, along with weak financial inflows and ongoing debt repayments, has contributed to a decrease in the SBP’s foreign exchange reserves. Furthermore, large-scale manufacturing output saw a decline in the first half of FY25, despite a significant month-on-month increase of 19.1 percent in December 2024. The shortfall in tax revenues from targets also widened in January and February.

On a brighter note, both consumer and business sentiments have improved recently. However, globally, uncertainty has risen significantly due to ongoing tariff escalations, which could affect global economic growth, trade, and commodity prices. In light of these developments, central banks in both advanced and emerging economies have recently moderated the pace of their monetary easing.

The Committee observed that the effects of the significant earlier reduction in the policy rate are now becoming evident. They emphasized the need to uphold a cautious monetary policy approach to keep inflation within the target range of 5 – 7 percent. Achieving this, along with implementing structural reforms, is crucial for fostering sustainable economic growth.

In the Real Sector, various high-frequency indicators—such as automobile sales, POL products, cement sales, import volumes, private sector credit, and the purchasing managers’ index—indicate that economic activity is picking up pace. Additionally, recent pulse surveys reveal a boost in consumer and business confidence. However, the Committee pointed out that the positive trends shown by these indicators have not yet fully translated into the Large Scale Manufacturing (LSM) data, which saw a contraction of 1.9 percent in the first half of FY25.

The slowdown in LSM growth is primarily attributed to a few low-weight sub-sectors, which have outweighed the positive developments in key areas like textiles, pharmaceuticals, automobiles, and POL. Meanwhile, in the agriculture sector, recent data, including satellite imagery, suggests that the risks to Rabi crops are diminishing following recent rainfall. The MPC anticipates a recovery in economic growth during the second half of FY25, supported by improving financial conditions. Overall, the Committee maintains its previous real GDP growth forecast of 2.5 – 3.5 percent for FY25 and expects economic activity to continue gaining momentum.

External Sector  

In January 2025, the current account shifted to a deficit, primarily driven by a significant increase in imports, which reduced the cumulative surplus to $0.7 billion for the period of July to January FY25. The rise in import volumes has been consistent with the rebound in economic activity, and the increase in certain global commodity prices further elevated import costs in January. Nevertheless, strong remittances from workers, along with moderate growth in exports, played a crucial role in covering the higher import expenses.  

The Monetary Policy Committee (MPC) noted that these trends align with their expectations and maintained their forecast for a surplus in the FY25 current account, projecting a deficit of 0.5 percent of GDP. However, net financial inflows have been weak, largely due to a shortfall in anticipated official inflows. The MPC also pointed out that most debt repayments for the year have already been completed. With reduced debt repayments and the expected realization of planned official inflows in the upcoming months of FY25, the State Bank of Pakistan’s foreign exchange reserves are anticipated to exceed $13 billion by June 2025. Looking ahead, the MPC stressed the need to bolster external buffers amid increased global economic uncertainty.  

Fiscal Sector  

The fiscal accounts for the first half of FY25 show an improvement in both the overall and primary balances compared to last year. This positive trend is largely due to a significant increase in revenues, especially from non-tax sources, along with controlled spending, particularly in subsidies. However, the Monetary Policy Committee (MPC) observed that the shortfall in Federal Board of Revenue (FBR) tax revenue against its target has further widened in January and February 2025. The Committee believes that the fiscal buffer created by managing current expenditures and the anticipated decrease in interest payments may help keep the overall fiscal balance near the FY25 target. Nonetheless, achieving the primary balance target will be more difficult. The MPC also highlighted the necessity of ongoing fiscal consolidation to maintain macroeconomic stability and stressed the importance of fiscal reforms aimed at expanding the tax base.

Money and Credit  

The growth of broad money (M2) has remained steady at approximately 11.4 percent year-over-year since the last Monetary Policy Committee (MPC) meeting. The Committee observed a shift in the net domestic assets (NDA) composition, with government borrowing from the banking sector increasing and private sector credit (PSC) experiencing a larger-than-expected seasonal net retirement. This trend was anticipated due to banks' aggressive lending practices in Q2-FY25 to mitigate ADR-related taxation. Nevertheless, the MPC noted that PSC growth, currently at 9.4 percent, remains substantial, indicating the positive effects of improved financial conditions and ongoing economic recovery. On the liabilities side, the amount of currency in circulation has risen, while the growth of deposits has continued to slow since the last MPC meeting.

Inflation  

Thanks to favorable supply-side factors, headline inflation dropped to 1.5 percent year-over-year in February 2025, down from 2.4 percent the previous month. The significant decrease in prices for perishable food items has reinforced the influence of ample stocks of key non-perishable goods on overall food pricing. Additionally, energy prices have benefited from a decline in global oil prices, a stable exchange rate, and a favorable base effect.  

However, core inflation remains high and is proving to be more persistent than expected. Consumer and business inflation expectations present a mixed outlook. Given these circumstances, the Committee anticipates that inflation will decrease further before gradually rising and stabilizing within the target range of 5 to 7 percent. This inflation forecast, however, is vulnerable to risks primarily stemming from fluctuations in food prices, the timing and extent of energy price adjustments, new revenue measures, protectionist policies in major economies, and the uncertain trajectory of global commodity prices.