SBP Keeps Policy Rate Unchanged at 12% Amid Inflation Concerns

Monetary Policy Decision

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) announced on Monday that the policy rate will remain unchanged at 12%, citing expectations of a temporary rise in inflation between March and May.

In its official statement, the MPC stated, “At its meeting today, the committee decided to keep the policy rate unchanged at 12 percent.”

Inflationary Trends and Risks

Despite a decline in overall inflation, the committee expressed concerns over volatile food and energy prices, which could temporarily push inflation upward. Core inflation remains at an elevated level, suggesting underlying price pressures persist.

The MPC emphasized that while inflation dropped to 2.4% in January, the lowest in over nine years, and is expected to decline further to 2.2% in February, the risk of inflation resurgence remains due to external and domestic factors.

Economic Indicators and External Account Pressures

The committee noted signs of improvement in economic activity, as reflected in various high-frequency indicators. However, it also highlighted challenges posed by rising imports and weak financial inflows, which are exerting pressure on the external account balance.

The MPC maintained that the current real interest rate remains adequately positive on a forward-looking basis to sustain macroeconomic stability.

IMF Review and Monetary Policy Outlook

The decision follows an International Monetary Fund (IMF) delegation review of Pakistan’s $7 billion bailout program. The discussions focused on revenue targets and taxation measures, which could impact inflation and monetary policy.

Since June 2024, the SBP has pursued an aggressive monetary easing policy, reducing the policy rate by a total of 1,000 basis points (bps) over six months. However, analysts suggest that the pace of future rate cuts may slow due to a widening current account deficit and rising market yields.

If the IMF review is approved before the June budget, Pakistan could secure the next tranche of funding, supporting its ongoing economic reform commitments under the bailout program.

The SBP’s decision to hold the policy rate at 12% reflects its cautious stance amid short-term inflationary pressures and external financial challenges. While inflation has significantly declined, persistent core inflation and external account vulnerabilities necessitate a balanced monetary approach. The outcome of the IMF review and future economic developments will likely shape Pakistan’s monetary policy trajectory in the coming months.