As the State Bank of Pakistan (SBP) prepares to announce its monetary policy on July 30, 2025, expectations of another rate cut are making the rounds. However, a sober analysis of macroeconomic indicators suggests that maintaining the status quo is the prudent course of action.
A Historic Easing Cycle Already in Motion
Since mid-2023, Pakistan’s monetary stance has undergone a dramatic shift. The policy rate has declined from a peak of 22% to 11%—a staggering 1,100 basis point reduction. This pivot, while welcome for borrowers and businesses, is already highly accommodative.
It’s important to understand that monetary easing operates with a lag. Its full transmission into the real economy typically takes two to three quarters. Cutting rates again at this juncture would risk overstimulating an economy still digesting the previous loosening cycle.
Inflation: The Base Effect Mirage
Headline inflation has moderated to the 3–4% range year-on-year, but this softening is primarily a base effect. The underlying drivers—energy tariffs, international commodity cycles, and currency dynamics—suggest that price pressures could return in the coming quarters.
With:
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Energy prices being rationalized under the National Tariff Policy (NTP 2025–30),
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Global oil and food prices displaying upward momentum,
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And the rollback of remittance-linked incentives,
…it is reasonable to project a reacceleration in inflation toward the 7–9% band by year-end.
To maintain positive real interest rates (typically 3–5% above inflation), the SBP must resist further cuts. Historically, slipping below this corridor has led to demand-pull inflation, balance-of-payments pressure, and currency depreciation.
Year Three: The Most Dangerous Phase
Governor Jameel Ahmad has emphasized avoiding the boom-bust trap that has historically plagued Pakistan’s macroeconomic cycles. The third year of stabilisation efforts is particularly sensitive.
Here’s why:
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The political cycle starts heating up.
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Foreign exchange reserves, though improved, are still propped up by rollovers and deferred liabilities.
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Investor sentiment tends to become overly optimistic, masking structural vulnerabilities.
This is not the time to overplay monetary stimulus. The illusion of external stability shouldn’t trigger policy complacency.
Exports, Not Optics, Should Drive Further Easing
The NTP 2025–30 is reducing input costs for export-oriented sectors. But rather than celebrating prematurely, policymakers should wait to see measurable gains in:
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Export volumes and diversification,
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Foreign direct investment (FDI),
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Supply chain integration in sectors like IT, agro-processing, and light engineering.
Let Moody’s, S&P, and the bond market reward Pakistan with tighter credit default swap (CDS) spreads and potential sovereign rating upgrades. That’s when deeper rate cuts can be justified.
Remittance Incentives: A Risk Hiding in Plain Sight
One of the most underappreciated risks is the withdrawal of incentives on incremental remittances. The previous Rs200 billion subsidy helped generate $8 billion in additional inflows—a multiplier that cannot be ignored.
Reversing these incentives may:
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Reduce foreign inflows,
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Weaken the rupee,
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Increase reliance on hot money and debt.
With import demand expected to rise (especially due to reduced duties on used cars and improved agriculture output), the current account could swing back into deficit territory. This would directly threaten currency stability.
Sugar Mills Halts Share Buyback Amid Speculative Price Surge
Smarter Alternatives to Blanket Rate Cuts
Rather than lowering the policy rate across the board, the SBP should deploy targeted credit enhancement measures, such as:
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Increasing auto financing limits to counteract a surge in used car imports.
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Scaling up low-cost housing finance to reignite construction-led employment.
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Expanding access to student and SME credit, particularly in high-multiplier sectors like IT and logistics.
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Promoting green finance tools under existing schemes for EVs, solar leasing, and agribusiness.
These tools deliver stimulus where it’s most needed—without fuelling consumption-driven imports.
Conclusion: Monetary Policy Is a Signal, Not a Shortcut
Sustainable economic growth will not come from front-loading monetary stimulus, but from incentivizing productivity, reforming public enterprises, and deepening export competitiveness.
If Pakistan wants:
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A stable rupee,
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Contained inflation,
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And a credible macroeconomic trajectory,
then it must send the right signals—especially to global investors, credit agencies, and domestic stakeholders.
The July 30 decision is not just about rates. It’s about restoring credibility and prioritizing long-term stability over short-term optics.
Further Links: State Bank of Pakistan – Monetary Policy