Fiscal discipline vs monetary easing: Is there room for rate cuts?

Pakistan's recently announced budget for the financial year 2026 includes a series of new revenue measures, such as a PKR 2.5 per liter carbon levy on petroleum products and higher taxes on interest income.

These could trigger fresh inflationary pressures, complicating the State Bank of Pakistan’s (SBP) price stability mandate.

Furthermore, the government has projected PKR 2.4 trillion in profits from the SBP as part of its non-tax revenue — a figure that experts warn could compromise the central bank’s operational independence.

“When the budget depends this heavily on SBP transfers, it becomes harder for the central bank to act independently on interest rates,” said another analyst. “It also creates pressure to maintain profit-generating operations, rather than pursuing aggressive rate cuts.”

While the budget does contain growth-friendly incentives, such as tax relief for the salaried class and stimulus for the construction and agriculture sectors, the broader fiscal framework remains tight.

Subsidy allocations have been reduced, and new enforcement mechanisms aim to broaden the tax base, particularly targeting the digital and informal sectors.

While interest rates have already been reduced significantly from 22% to 11%, the budget projected inflation of 7.5% and economic growth of 4.2%.

Along with IMF oversight, inflation risks, revenue dependence on SBP, and structural weaknesses collectively constrain the SBP from continuing an aggressive expansionary stance.

The central bank is likely to adopt a measured, data-driven, and cautious approach, rather than broad-based monetary easing.