Moaaz Manzoor

Pakistan’s monetary environment is expected to remain supportive of economic activity in fiscal year 2025-26, with the average policy rate projected to settle near 10 percent as inflation moderates and the central bank maintains a cautious but accommodative stance.

According to the Pakistan Macroeconomic Outlook FY2026 prepared by the Research and Publications Department of the Institute of Cost and Management Accountants of Pakistan (ICMA), the policy rate is likely to decline significantly from last year’s levels, reflecting easing price pressures and a shift toward promoting stable growth.

In FY25, the average policy rate stood at 16 percent, down from 22 percent in FY24, following a series of measured reductions by the State Bank of Pakistan (SBP). These cuts were aimed at stabilising the economy after a period of elevated inflation while gradually lowering borrowing costs for businesses and consumers.

The easing cycle appears set to continue into the current fiscal year. ICMA expects the average rate to hover around 10 percent in FY26. Data from the first half of the year, covering July to December, show the policy rate already declining to about 10.5 percent, indicating that monetary conditions have become notably softer compared with previous years.

The projected moderation in interest rates aligns with improving inflation trends. Pakistan’s average Consumer Price Index (CPI) inflation is anticipated at around 6 percent in FY26, compared with 4.5 percent in FY25. Although slightly higher than last year, this level remains far below the exceptionally elevated rates witnessed earlier, suggesting that overall price pressures are relatively contained.

Early-year figures support this outlook. Inflation during July to December FY26 averaged about 5.25 percent year-on-year, reflecting a more stable price environment. However, ICMA notes that some underlying pressures persist, particularly from supply-side constraints, energy tariff adjustments, and volatility in food and transport costs.

Given these conditions, the monetary approach is expected to remain balanced. While lower rates can encourage investment and spending, maintaining inflation within a manageable range remains a priority. ICMA indicates that the SBP has carefully calibrated rate adjustments to support growth without creating fresh risks to price stability.

Reduced borrowing costs can have broad implications for the economy. Businesses may find it easier to finance expansion plans, while households benefit from more affordable credit for consumption and housing. Lower interest expenses can also improve liquidity conditions across the financial system, supporting commercial activity.

At the same time, the report suggests that policymakers are likely to proceed cautiously. Core inflation remains somewhat persistent, suggesting rates may remain close to current levels for most of FY26 rather than fall sharply. This measured stance is intended to maintain confidence and prevent abrupt fluctuations in financial markets.

ICMA’s projection of a 10 percent average policy rate, therefore, reflects a transition toward more stable and predictable monetary conditions. The combination of moderate inflation and lower interest costs suggests an environment that fosters steady economic activity while safeguarding macroeconomic balance.

As the fiscal year unfolds, the trajectory of prices and broader economic indicators will continue to guide the central bank’s decisions, shaping the pace of any further adjustments in monetary policy.

Credit: INP-WealthPk