Islamabad
The State Bank of Pakistan (SBP) Monetary Policy Committee, in its September 15, 2025, meeting, chose to keep the policy rate steady at 11 percent, continuing its conservative approach in spite of historically low inflation and better macroeconomic signals.
In its release, the central bank pointed out that the short-term but substantial shock of the recent floods has further deteriorated the near-term economic prospects.
According to the Press Release issued from the PIDE, it was said that major crops like sugarcane, rice, cotton, and vegetables have been widely damaged in Punjab, increasing the threat of food supply disruptions in the months ahead.
While the above risks, the SBP highlighted that the economy of Pakistan is on a stronger footing to withstand the spill over than in previous occasions due to a two-year accumulation of external and fiscal buffers under the IMF Extended Fund Facility (EFF).
This has allowed the central bank to focus on balancing growth with price and exchange rate stability, while maintaining inflation expectations within the target range of 5–7 percent in the medium term.
Significantly, headline inflation dipped to 3 percent in August, the lowest level in over a decade, while the average inflation for FY2025 remained at 4.5 percent.
Prior to the announcement, the Pakistan Institute of Development Economics (PIDE), in its Macro Policy Lab, had projected that the SBP would decide to leave the policy rate unchanged. PIDE’s analysis noted that while inflationary dynamics had improved considerably, the risks stemming from flood-related food shocks and rising reconstruction costs constrained the case for an aggressive easing cycle.
PIDE also highlighted that Pakistan’s current account deficit expanded to USD 254 million in July 2025 after it had a surplus during the previous year, and premature monetary easing poses a threat to the rupee as well as external stability.
Private sector players, nonetheless, were disappointed with the cautious stance of the central bank. Most had contended that the need for a rate reduction was to relieve the strain of expensive borrowing, drive private investment, and revive business confidence when liquidity crunch and poor demand persist to undermine industrial revival.
A cut of 100 basis points, they argued, would have been a significant move in cutting financing cost without tampering with price stability, considering that real interest rates are still way above 600 basis points.
PIDE’s post-policy analysis stresses that the future of the economy is to achieve a delicate balance between upholding stability and promoting growth.
The first priority should be to control post-flood inflation pressures without weakening recovery. This calls for selective supply-side adjustments like easing food imports where needed, building up logistics and distribution networks, and checking profiteering so that the weight of price control is not left solely on monetary policy.
When temporary food price shocks subside, PIDE recommends that monetary policy should then shift towards supporting gradual growth. A cautious cut of 25–50 basis points in the latter part of the year, subject to inflation remaining under 6 percent and external accounts remaining in balance, will send a necessary signal to the private sector without jeopardizing macroeconomic stability.
Further, credit provision to the private sector needs to be accorded top priority. Low-cost finance facilities for the flood-hit SMEs, agriculture, and export-oriented sectors will be crucial to rebuild industrial production, create employment, and protect export competitiveness.
The institute also emphasizes coordination between monetary and fiscal policy. Monetary policy brings short-term stability, but fiscal policy should take a complementary role by investing in reconstruction, rehabilitation of agriculture, and infrastructure development.
Such a coordinated approach would enable Pakistan to maintain stabilization gains while still leaving space for demand recovery.
The SBP’s decision to hold the policy rate at 11 percent reflects a cautious balancing act — anchoring stability amid uncertainty without resorting to steps that might destabilize the external account.
But as PIDE has repeatedly emphasized, the true test is not in bringing about temporary stabilization but in converting it into lasting economic recovery. The test ahead will be whether Pakistan can use IMF-supported stability to unlock private investment, restore agriculture, and build resilience against future shocks.
Without this pivot, the risk remains that the economy will stay trapped in low growth even as inflation stabilizes.
