Analysts and market participants are anticipating a 50 basis points cut in the policy rate when the State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) meets next week, lowering the interest rate to 10.5%.
The anticipation relies on softening inflation, external accounts in a relatively stable position, and bond yields already trending downward. However, potential risks persist.
Headline inflation has continued its downward trajectory, with June 2025’s Consumer Price Index (CPI) reading at 3.2%, down from 3.5% in May. Core inflation followed suit, declining to 7.5% in June.
Analysts forecast average headline inflation for FY26 to remain within the SBP’s medium-term target range of 5-7%, with a base case of 5.4%. Core inflation is also expected to hover near 8%. These favorable dynamics provide SBP with the flexibility to ease policy.
However, recent floods pose a downside risk by potentially disrupting food supply chains and pushing food inflation higher in the months ahead, an issue the MPC will likely weigh carefully.
Pakistan recorded a $328 million current account surplus in June 2025, pushing the full-year FY25 surplus to $2.1 billion, a reversal from $2.1 billion deficit posted in FY24. The stronger external balance has bolstered investor confidence and macroeconomic stability. Though the current account is expected to slip back into a mild deficit of around $1.6 billion in FY26, analysts consider it manageable, especially given continued external inflows.
The Pakistani rupee has also remained relatively stable, depreciating by only 0.4% so far in FY26. S&P’s recent upgrade of Pakistan’s credit rating to ‘B-’ with a Stable outlook further underscores improving investor sentiment.
Large-Scale Manufacturing (LSM) posted 2.3% year-on-year growth in May 2025, signaling signs of recovery. However, the sector still saw a contraction of 1.2% over the first 11 months of FY25, indicating that the rebound remains fragile. A cut in the policy rate could lower borrowing costs and help reinvigorate industrial productivity—particularly for credit-sensitive sectors.
The bond market appears to have priced in a rate cut. Yields on 3-, 5-, and 10-year government papers have dropped by 35bps, 31bps, and 30bps, respectively, since the last policy meeting. Short-term yields have also declined between 19bps and 29bps, reflecting market optimism for monetary easing.
According to a pre-policy survey conducted by Arif Habib Limited, 79% of respondents expect the SBP to lower the policy rate. Of these, 47% anticipate a 50bps cut, while 32% foresee a more aggressive 100bps reduction. The remaining 21% believe the central bank will hold rates steady at 11%.
Respondents included stakeholders from financial institutions such as banks, asset management firms, insurers, and DFIs, as well as representatives from key real sectors including cement, fertilizers, textiles, pharmaceuticals, and steel.
With inflation trending lower, external balances improved, and market sentiment supportive, SBP appears to have sufficient room to lower rates. A 50bps cut could serve as a confidence booster for investors and businesses alike, while also supporting a nascent industrial recovery.
Nonetheless, risks such as climate-related disruptions and rising import demand require close monitoring. The path ahead calls for both decisive action and prudent vigilance.