The State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) on Monday decided to keep the policy rate unchanged at 12 percent, citing risks posed by volatility in food and energy prices and the “persistent” elevated level of core inflation.
Ahead of the MPC meeting, analysts had forecast that the central bank would not reduce the policy rate by more than 50 basis points. This marks the first time since June 2024 that the MPC has not reduced the policy rate, with the past six consecutive meetings seeing the interest rate slashed from 22 percent to 12 percent.
In a statement issued after the MPC meeting, the central bank noted inflation in February 2025 turned out lower than expectation, but inherent volatility in the prices of food and energy remained a risk. It noted that core inflation was proving to be more persistent at an elevated level and thus uptick in the food and energy prices may lead to increase in inflation.
Meanwhile, it said, economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators. It said it had viewed some pressures on the external account 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 MPC noted several key developments since its last meeting. It noted the current account had turned into a deficit of $0.4 billion in January 2025 after remaining in surplus for several months. This, coupled with weak financial inflows and ongoing debt repayments, led to a decline in the SBP’s foreign exchange reserves. Second, it noted large-scale manufacturing output declined during the first six months of the ongoing fiscal year despite a substantial month-on-month increase of 19.1% in December 2024. 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.
It further noted that central banks in advanced and emerging economic had slowed their pace of monetary easing in response to these developments.
Led by conducive supply-side dynamics, the Committee noted that headline inflation had further declined to 1.5% year-on-year in February 2025 from 2.4% in the preceding month. The steep fall in prices of perishable food items reinforced the impact of sufficient stocks of major non-perishable items on overall food prices. Similarly, energy prices continued to benefit from moderation in global oil prices, stable exchange rate and favorable base effect.
However, core inflation remains at an elevated level and is proving stickier than anticipated. Inflation expectations of consumers and businesses are also showing a mixed picture. In view of these developments, the Committee assessed inflation to come down further before gradually inching up and stabilizing within the target range of 5-7%.
This inflation outlook, however, is susceptible to risks emanating mainly from volatility in food prices, timing and magnitude of energy price adjustments, additional revenue measures, protectionist policies in major economies and uncertain outlook of global commodity prices.