SBP Holds Interest Rates Amid Inflation Relief, Economists Call for Structural Reforms

Islamabad– The State Bank of Pakistan (SBP) has decided to keep the interest rate unchanged at 12%, halting its historic monetary easing cycle. This move comes as inflation has cooled significantly, providing room for growth but also raising concerns over the country’s trade deficit and currency stability.

Economists have cautioned that while rate cuts may stimulate short-term growth, they are not a comprehensive solution. According to Vaqar Ahmed, economist and team lead at Oxford Policy Management, interest rate reductions need to be paired with fiscal reforms to be truly effective. “The rate cuts alone may not meet growth targets. They need to be complemented by prudent fiscal measures, such as tax reforms, energy sector viability, and privatisation of state-owned enterprises, to encourage private sector investment,” he stated.

The SBP’s decision to hold rates comes after a series of interest rate cuts, totaling 1,000 basis points from a high of 22% in June 2024, aimed at reviving Pakistan’s struggling economy. However, the economy grew by just 0.9% in the first quarter of the fiscal year, significantly below the target of 2.5%-3.5%. The central bank remains optimistic that economic growth will pick up pace in the second half of the fiscal year.

The government faces ongoing challenges from high energy tariffs and the need for fiscal austerity as part of its International Monetary Fund (IMF) programme. With the trade deficit widening by 18% in January to $2.313 billion, economists are anticipating that SBP may resume rate cuts later in the year, provided inflation remains under control.

Saad Hanif, head of research at Ismail Iqbal Securities, noted that the SBP will likely wait for more clarity on external factors, such as inflation trends, before resuming rate cuts. “Once the SBP is confident about achieving its medium-term inflation target of 5-7%, they are expected to resume rate cuts, albeit at a slower pace,” he explained.

Pakistan’s banking sector is also grappling with high domestic debt, which the IMF reports is primarily financed by banks, thus crowding out private sector credit. This hampers policy transmission and the impact of interest rate changes on the private sector, further complicating efforts to stimulate growth.

Read more: SBP Keeps Policy Rate Unchanged at 12% Amid Economic Uncertainty

Despite inflation falling to a near-decade low of 1.5% in February, concerns about borrowing remain. Economists warn that if the government leverages low interest rates to increase borrowing for an expansionary budget, it could destabilize Pakistan’s progress under the IMF programme.

Consumer purchasing power continues to be a key hurdle to recovery, with retail volumes of major brands dropping by 10-15% over the past year due to stagnant incomes and high taxes. Asfandyar Farrukh, chairman of the Chainstore Association of Pakistan, emphasized that many medium and large retailers are either consolidating or closing down, leaving only a few financially strong players in the market.

With mounting challenges in both fiscal and monetary policy, the government’s next steps will be critical in ensuring long-term stability and fostering sustainable growth in Pakistan’s economy.