Not in line with expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has maintained the policy rate stable at 12%.
“At its meeting today, the MPC decided to keep the policy rate unchanged at 12 percent,” the MPC said in a statement.
“The committee noted that inflation in February 2025 turned out lower than expectation, 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. At the same time, core inflation is proving to be more persistent at an elevated level and thus uptick in the food and energy prices may lead to increase in inflation.”
The MPC noted that economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators.
“Moreover, the MPC viewed that some pressures on the external account have emerged due to rising imports amidst weak financial inflows.
“On balance, the MPC assessed the current real interest rate to be adequately positive on forward-looking basis to sustain the ongoing macroeconomic stability.”
In its meeting on January 27, the MPC reduced the key policy rate by 100bps to 12%.
The MPC also noted the key developments since its last meeting.
“First, the current account turned into a deficit of $0.4 billion in January 2025 after remaining in surplus over the past few months. This, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP’s FX reserves. Second, large-scale manufacturing output declined during H1-FY25, despite a substantial m/m increase of 19.1 percent in December 2024. Third, the shortfall in tax revenues from target widened further in January and February. Fourth, both consumer and business sentiments improved during the latest waves. And lastly, on the global front, 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.”
“Based on these developments, the MPC noted that the impact of sizable earlier reduction in policy rate is now materializing. The MPC reiterated the importance of maintaining a cautious monetary policy stance to stabilize inflation within the target range of 5–7 percent.
“This, along with structural reforms, is essential to achieve sustainable economic growth.”
Inflationary expectations
The MPC said that headline inflation further declined to 1.5 percent y/y in February 2025 from 2.4 percent in the preceding month, due to conducive supply-side dynamics.
“The steep fall in prices of perishable food items reinforced the impact of sufficient stocks of major non-perishable items on overall food prices. Similarly, energy prices continued to benefit from the moderation in global oil prices, stable exchange rate and favorable base effect.
“However, core inflation is still at an elevated level and is proving stickier than anticipated.”
The MPC assessed inflation to come down further before gradually inching up and stabilizing within the target range of 5 – 7 percent.
“This inflation outlook, however, is 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.”
Market expectations
Most market experts had expected the central bank to continue its monetary easing stance as a declining inflation rate has driven expectations of a seventh-successive cut.
A Business Recorder poll of analysts showed a median expectation of a 50bps rate cut, with only one analyst anticipating no change.
“We see that the central bank has room for a 50-100bps cut going forward. However, in the upcoming MPC, a 50bps cut is more likely,” said Waqas Ghani, Head of Research at JS Global.
Similarly, Saad Hanif, Head of Research at Ismail Iqbal Securities, noted that the central bank was expected to adopt a cautious stance. “The central bank may cut the policy rate by up to 50bps in the upcoming MPC,” he said.
Arif Habib Limited (AHL), another brokerage house, expected SBP to extend its rate-cutting cycle with another 50bps reduction in the upcoming monetary policy review, which would bring “the policy rate to 11.5%”.
“Given the sharp decline in inflation and stable reserves, a 50bps rate cut seems like a logical step in the upcoming policy meeting,” it said.
On the other hand, analysts at Topline Securities believed that the central bank’s MPC would observe the status quo in the upcoming meeting.
The brokerage house in its report attributed the status quo to several factors, including the IMF review and PKR depreciation.
Previous MPC meeting
At its last meeting, the MPC cut the key interest rate by 100bps, in line with market expectations.
The MPC at the time observed that “a cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth. In this regard, the MPC assessed that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5-7%.”
Since the last MPC meeting, several key economic developments have occurred.
The rupee has depreciated by 0.4%, while petrol prices decreased by 0.2%.
Internationally, oil prices have declined since the last MPC, hovering around $70 per barrel amid improved supply.
Pakistan’s headline inflation clocked in at 1.5% on a year-on-year basis in February 2025, a reading below that of January 2025 when it stood at 2.4%, showed Pakistan Bureau of Statistics (PBS) data.
In addition, Pakistan’s current account posted a deficit of $420 million in January 2025, a significant increase of 4% when compared with the deficit of $404 million in the same month of the previous year. This was the first deficit after five consecutive months of current account surplus.
Foreign exchange reserves held by the State Bank of Pakistan (SBP) increased by $27 million on a weekly basis, clocking in at $11.25 billion as of February 28, data released on Thursday showed.
Total liquid foreign reserves held by the country stood at $15.87 billion, while net foreign reserves held by commercial banks amounted to $4.62 billion.
