The State Bank of Pakistan (SBP) on Monday decided to maintain its key policy rate at 12% in its latest monetary policy announcement. This move halts a cycle of rate reductions that had seen six consecutive cuts since June 2024, when the rate was at a peak of 22%.
According to a notification issued by the SBP, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 12pc, noting that inflation in February 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 notification said.
It said that core inflation was proving to be more persistent at an elevated level, thus, the uptick in food and energy prices might lead to an increase in inflation.
“Economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators,” it said, adding that MPC viewed that some pressures on the external account emerged due to rising imports amid weak financial inflows.
“The MPC assessed the current real interest rate to be adequately positive on [the] forward-looking basis to sustain the ongoing macroeconomic stability,” the notification said.
According to the notification, the committee noted that the current account turned into a deficit of $0.4 billion in January after remaining in surplus over the past few months.
It said that the current account deficit, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP’s foreign exchange reserves.
It said that large-scale manufacturing output declined during the first half of the fiscal year 2025, despite a substantial increase of 19.1pc in December 2024.
“The shortfall in tax revenues from target widened further in January and February,” the notification said.
“Both consumer and business sentiments improved during the latest waves,” it said, adding that uncertainty has increased significantly amid the ongoing tariff escalations, which might 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,” it said.
“Based on these developments, the committee noted that the impact of sizable earlier reduction in policy rate is now materialising,” it added.
The MPC reaffirmed the necessity of maintaining a cautious monetary policy stance to stabilize inflation within the target range of five to seven per cent, emphasizing that structural reforms are crucial for achieving sustainable economic growth.
It highlighted that high-frequency indicators—such as automobile sales, import volumes, private sector credit, and the purchasing managers’ index—suggest economic activity is gaining momentum.
“Recent pulse surveys indicate improved consumer and business confidence,” it stated, adding that while these positive trends are evident, their full impact has yet to be reflected in Large-Scale Manufacturing (LSM) data, which contracted by 1.9% in the first half of FY25.
“The decline in LSM growth is primarily due to a few low-weight sub-sectors, which have more than offset gains in key industries,” it noted, expressing optimism that economic growth will recover in the latter half of FY25 as financial conditions ease.
The committee maintained its earlier real GDP growth projection and anticipated further acceleration in economic activity.
Regarding external accounts, the statement noted that the current account turned into a deficit in January, reducing the cumulative surplus to $0.7 billion for July-January FY25.
“Rising import volumes, aligned with increased economic activity, along with higher global commodity prices, pushed up import payments in January,” it observed. However, robust workers’ remittances and moderate export growth helped finance the elevated imports.
The MPC assessed that these developments align with expectations and reaffirmed the FY25 current account balance projection, forecasting a surplus or a deficit of 0.5% of GDP. It also stressed the need to strengthen external buffers amid heightened global economic uncertainty.
On fiscal performance, the notification reported improvements in both the overall and primary balance for H1-FY25 compared to the previous year, driven by a substantial rise in revenues—especially non-tax revenues—and controlled expenditures, particularly subsidies.
However, it acknowledged that the Federal Board of Revenue’s (FBR) tax revenue shortfall widened further in January and February.
The committee noted that fiscal restraint, coupled with an expected decline in interest payments, could help keep the overall fiscal balance near the FY25 target. It reiterated the importance of continued fiscal consolidation to support macroeconomic stability and emphasized the need for tax base expansion.
Regarding inflation, the notification stated that broad money growth remained steady at around 11.4% year-on-year since the last MPC meeting, with a compositional shift in Net Domestic Assets (NDA) as government borrowing from banks rebounded, while private sector credit showed a greater-than-seasonal net retirement.
This trend was expected due to aggressive bank lending in Q2-FY25 to avoid ADR-related taxation.
“Nonetheless, PSC growth remains significant at 9.4%, reflecting the impact of easing financial conditions and ongoing economic recovery,” it noted.
On the liability side, the statement pointed out that currency in circulation increased, while deposit growth decelerated further since the last MPC meeting.
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