Qudsia Bano

As Pakistan struggles with economic challenges, experts are increasingly sounding the alarm over the high monetary policy rate of 12%, warning that it is stifling economic growth and hindering businesses’ ability to thrive, reports WealthPK.

Despite the country’s inflation rate easing to its lowest level in nearly a decade, with inflation recorded at 1.5% in February 2025, the State Bank of Pakistan (SBP) has kept the policy rate significantly higher than the core inflation, maintaining a gap of 1,050 basis points. Atif Ikram Sheikh, President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), emphasized that the high interest rate is negatively impacting business activities. 

“The current policy rate is too high, hampering growth in key sectors. Businesses face higher borrowing costs, discouraging investment and slowing production. The government needs to take immediate action to lower the rate in line with the inflation trends,” he said. He also pointed out that the industries across Pakistan have voiced dissatisfaction with the SBP’s monetary stance, as it raises the cost of doing business, further straining an already fragile economy.

Economists agree that the policy rate needs to be aligned more closely with the inflation rate to foster an environment conducive to economic expansion. Dr. Shahid Kardar, a former economist at the State Bank of Pakistan, argued that the high policy rate is exacerbating the country’s economic difficulties. “The core inflation is hovering between 1-3%, yet the policy rate remains excessively high.

This disparity is creating an economic environment where businesses cannot access an affordable credit, thus stalling investment and growth,” he explained. Kardar further noted that Pakistan’s economy is already facing numerous challenges, including current account deficit, rising debt, and a volatile currency market, and suggested a more rationalized monetary policy to mitigate these pressures. “By reducing the policy rate, the government would commit to supporting businesses and stimulating economic activity at a critical time.

It is essential for sustainable growth,” he added. The Finance Division recently highlighted that the core inflation is expected to remain between 1-3% in the coming months, driven by falling commodity prices and easing inflationary pressures. Despite this, the central bank’s decision to maintain a high interest rate is viewed as counterproductive in an environment where the economy is desperately in need of stimulation.

Many sectors are feeling the strain, particularly small and medium-sized enterprises (SMEs), which are key drivers of employment and innovation in the country. The high borrowing costs have forced many businesses to delay or scale back investments, further exacerbating unemployment and underdevelopment in key sectors. Both Sheikh and Kardar agreed that the policy rate reduction is vital for unlocking economic potential.

While experts are calling for a 500 basis points cut, the SBP remains cautious, citing risks of renewed inflationary pressures. However, experts argue that with inflation under control and economic growth at a standstill, lowering interest rates is a crucial step toward economic recovery. The coming months will tell whether Pakistan’s policymakers will heed the expert advice and take steps to bring the policy rate in line with the nation’s economic realities.

Credit: INP-WealthPk