Just two days before the Monetary Policy Committee (MPC) is set to announce its decision, the federal government has projected July 2025 inflation between 3.5% and 4.5%, intensifying pressure on the State Bank of Pakistan (SBP) to slash interest rates currently standing at 11%.
The monthly economic outlook released by the Finance Ministry’s Economic Advisor Wing on Monday highlights stabilizing price trends and improved economic indicators, bolstering the case for a significant interest rate reduction into single digits.
“Inflation is projected to remain within 3.5–4.5%, though risks from recent heavy rains may affect agricultural yields and supply chains,” the report noted.
Think Tank Pushes for 6% Interest Rate
A day earlier, a newly launched think tank — the Economic Policy and Business Development (EPBD) — called on the SBP to cut the policy rate to 6%, citing Pakistan’s high real interest rate of 7.8% as the highest in the region.
In comparison:
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India’s real rate stands at 3.4%
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China’s real rate is just 1.4%
“This excessive real cost of capital makes Pakistani business investments fundamentally uncompetitive,” EPBD stated.
The EPBD report warns that without a dramatic rate reduction, Pakistan’s industrial sector will continue to stagnate, limiting growth, job creation, and export expansion.
Regional Disadvantage & Growth Struggles
Despite regional peers promoting investment through moderate interest policies, Pakistan’s punitive real interest rate has:
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Constrained economic growth to just 3.4%, compared to India’s projected 6.5% in 2026
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Left manufacturing capacity idle
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Maintained unemployment at 22%, far higher than India’s 4.2%
Additionally, Pakistan’s export-to-GDP ratio (10.48%) lags far behind India (21.85%) and Vietnam (87.18%).
Policy Rate vs. Inflation: A 7.8% Gap
With June inflation recorded at just 3.2%, the real interest rate gap has widened sharply. EPBD emphasized that maintaining the 11% interest rate is economically unjustified under current inflation conditions.
“Businesses cannot survive while servicing loans at 11% interest when inflation is under 4%. It’s a systemic chokehold on growth,” the report asserted.
The Finance Ministry echoed these concerns, stating that a rebound in exports, LSM output, and investment confidence depends on lower borrowing costs and policy support for industrial modernization.
Fiscal Implications of Rate Cut
Lower interest rates could also ease Pakistan’s ballooning debt servicing costs:
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59% of government debt is floating rate
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Debt servicing consumes 46% of the federal budget
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A cut to 6% could save Rs3 trillion annually
The government stated that fiscal consolidation, tax base expansion, and business climate improvements remain policy priorities, but acknowledged that without easing monetary policy, these reforms will lack traction.
Why SBP Must Hold Interest Rates on July 30 — Not Cut Again
What to Expect From the MPC Meeting?
The MPC will convene on July 30, and while markets expect only a 0.5%–1% rate cut, experts argue this falls far short of what is needed.
“Anything less than a 4–5% cut will fail to address the competitiveness crisis,” said a senior economist at EPBD.
Economic Outlook for FY2026
The government forecasts:
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Real GDP growth at 4.2%
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Stable inflation around 4%–4.5%
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Expansion in large-scale manufacturing
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Stronger remittances and export growth
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Decline in perishable food prices and housing costs
However, independent economists continue to question the government’s reported 2.7% growth last fiscal year, suggesting it overstates the pace of recovery.
Conclusion: A Test of Policy Resolve
Pakistan stands at a crossroads. With inflation under control and businesses gasping under heavy borrowing costs, the SBP’s upcoming policy decision will be a litmus test for its commitment to economic revival.
Visit Further Sites For Detail:
State Bank of Pakistan – Monetary Policy
Ministry of Finance – Economic Outlook
