Economic Outlook in Pakistan
The State Bank of Pakistan (SBP) is expected to reduce its key interest rate by 50 basis points to 10.5% on Wednesday, according to a Reuters poll. This decision is anticipated due to slowing inflation and improving external balances.
Analysts’ Forecasts
A survey of 14 analysts revealed that all of them expect the State Bank of Pakistan to cut rates. Nine analysts project a 50 basis point cut, which is also the median forecast, while four analysts anticipate a deeper 100 basis point cut, and one analyst expects a 25 basis point reduction.
Current Economic Conditions
Consumer price inflation stood at 3.2% in June, and the average inflation for the fiscal year ending June 30 fell to a nine-year low of 4.49%. This significant decrease in inflation rates is a positive indicator for the economy. With real rates firmly positive, most analysts expect easing to continue, supported by stabilizing indicators and high government borrowing costs.
Expert Insights
Sana Tawfik, head of research at Arif Habib Limited, noted that slowing inflation and an improved external account give the SBP room to cut rates. However, she warned that rising imports and currency pressure call for a cautious, data-driven approach. The SBP has already begun cutting rates from a record 22% in June 2024, pausing in March after 10 percentage points of easing, and then cutting by a further 100 basis points in May.
Reserves and Exchange Rate
The country’s reserves have grown to more than $14 billion, supported by International Monetary Fund inflows under a $7 billion program and bilateral financing. Despite this growth, renewed rupee pressure triggered a security-led crackdown on informal dollar trade, underscoring the government’s push to stabilize the exchange rate as the central bank considers further easing.
Future Outlook
SBP Governor Jameel Ahmad stated that the central bank would maintain a ‘tight’ stance to stabilize inflation within its 5-7% target. Ahmed Mobeen, senior economist at S&P Global Market Intelligence, said the SBP is likely to cut rates further but may adopt a more cautious pace in the second half of the year due to rising import demand and global commodity risks. Mustafa Pasha, chief investment officer at Lakson Investments, predicted that the central bank could gradually lower rates into the high single digits in the first half of 2026, given stronger buffers and the completion of the budget and IMF review.
Conclusion
The anticipated cut in the key interest rate by the State Bank of Pakistan is a positive sign for the country’s economy. With slowing inflation, improving external balances, and growing reserves, the SBP is likely to continue easing monetary policy. However, experts warn that the central bank must adopt a cautious approach due to rising imports and currency pressure. As the economy continues to stabilize, it is expected that the SBP will maintain a tight stance to achieve its inflation targets and support economic growth.
