Pakistan central bank decides to keep interest rate unchanged

After six consecutive rate cuts, Pakistan's central bank decided to keep the benchmark interest rate unchanged at 12%.

The decision was taken in a meeting of its Monetary Policy Committee (MPC) on Monday.

The announcement was not in line with market expectations. A survey of 14 analysts conducted last week by Nukta showed that most of them expected the interest rate to be reduced by 50-100 basis points.

The State Bank of Pakistan kicked off the monetary easing cycle in June 2024. Since then, the rate has been reduced by 1,000bps in six consecutive meetings to 12% — a more than two-year low.

The central bank decided to reduce the rate mainly on back of the drastic slowing of inflation rate in the country. In May 2023, it peaked at 38%. However, it started easing from January 2024, reaching 1.5% in February this year.

The real interest stands at 10.5%

SBP's reasons for keeping it unchanged

"Inflation in February turned out lower than expectation, mainly due to a drop in food and energy prices. Notwithstanding this decline, the committee assessed the risks posed by the inherent volatility in these prices to the current declining trend in inflation. At the same time, core inflation is proving to be more persistent at an elevated level and thus uptick in the food and energy prices may lead to increase in inflation," a statement released post-meeting said.

"Meanwhile, economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators. Moreover, the MPC viewed that some pressures on the external account have emerged due to rising imports amidst weak financial inflows. On balance, the MPC assessed the current real interest rate to be adequately positive on forward-looking basis to sustain the ongoing macroeconomic stability."

The SBP's Monetary Policy Committee noted that the current account turned into a deficit of $0.4 billion in January after remaining in surplus over the past few months. This, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the foreign reserves, it pointed out.

"Second, large-scale manufacturing output declined during H1-FY25, despite a substantial month-on-month increase of 19.1% in December. Third, the shortfall in tax revenues from target widened further in January and February. Fourth, both consumer and business sentiments improved during the latest waves. And lastly, on the global front, uncertainty has increased significantly amidst the ongoing tariff escalations, which may have implications for global economic growth, trade and commodity prices."

Thus, central banks in advanced and emerging economies have recently slowed the pace of monetary easing, the statement added.