Moaaz Manzoor

The State Bank of Pakistan (SBP) maintained the policy rate at 12%, prioritising stability over aggressive easing despite a sharp inflation drop, due to external risks and rising imports, reports WealthPK.

The SBP’s decision to keep the policy rate at 12% for the second consecutive meeting has surprised market observers, who anticipated a rate cut following a sharp decline in inflation. However, the central bank remains cautious, citing risks from volatile global commodity prices, a widening current account deficit, and external financing pressures.

While inflation fell to a decade-low of 1.5% year-on-year in February 2025, experts believe the SBP is prioritising long-term stability over immediate monetary easing. Speaking with WealthPK, Ahmad Mobeen, senior economist at S&P Global Market Intelligence, highlighted that inflation has significantly declined from its 2023 peak of 31%, with February 2025 recording the lowest level in over a decade.

This trend, driven by food price deflation and favourable base effects, has led the SBP to maintain its 12.0% policy rate in March 2025. Mobeen noted that base effects are expected to keep inflation subdued at a projected annual average of 6.1% through early 2025. However, he cautioned that global economic uncertainties, a strong US dollar, and the ongoing IMF Extended Fund Facility review could shape future monetary policy decisions.

“The central bank will tread carefully to balance inflation control with economic stimulus, ensuring that monetary easing does not undermine financial stability,” he stated. Dr Sajid Amin Javed, Deputy Executive Director of Sustainable Development Policy Institute (SDPI), called the MPC’s decision "measured and justified" given current economic conditions.

He noted that while inflation has sharply declined, the sustainability of this trend remains uncertain due to "sticky core inflation" and potential external shocks. He emphasised that "economic activity is picking up, and a sudden, aggressive rate cut could risk undoing the cautious macroeconomic stability achieved thus far."

He further explained that despite market expectations for a rate cut, the SBP is likely prioritising "a controlled downward trajectory in interest rates" rather than reacting to a temporary disinflationary phase. Javed also pointed out that the external account situation has shifted, with the current account deficit returning after months of surplus. “This, combined with an increase in imports and debt repayments, could create renewed pressure on the exchange rate.

In light of these risks, the SBP seems intent on maintaining a buffer rather than accelerating monetary easing.” The SBP's cautious stance underscores its attempt to balance supporting growth and maintaining inflation stability. Given the potential risks from fiscal adjustments, global trade uncertainties, and external imbalances, the decision to hold the rate steady at 12% aligns with the need for policy prudence prioritising sustainability over immediate relief.

Credit: INP-WealthPk