The SBP’s decision to maintain its benchmark policy rate at 11% defied widespread market expectations of a cut, but also underscores a necessary, if unpopular, commitment to macroeconomic stability. While inflation plummeted to a nine-year low of 4.49% in FY25 — a dramatic drop from 23.4% the previous year — the central bank made its decision while looking forward, not backward. Recent upward adjustments in energy prices, particularly gas tariffs, threaten to reverse gains in price stability. The SBP projects inflation could breach its five to seven per cent target range in the coming months, necessitating preemptive intervention.
While critics, especially industry groups, have derided the decision, noting the low monthly inflation rate of just 3.2%, the SBP also cited several other uncertainties, including a spike in imports that is also driving up the trade deficit, and volatility in international oil markets. In light of these very real threats to the health of the broader economy, industry groups’ demand for lower rates does seem myopic.
Cutting interest rates at this stage would also amount to throwing out all of the stabilisation successes of the past few years, including bolstering foreign exchange reserves, moving the current account into a surplus position, and earning sovereign credit rating upgrades.
Monetary policy cannot operate in isolation. Fiscal slippages, such as the Rs200 billion shortfall in tax revenue, undermine stability and limit the SBP’s flexibility. Given the number of Pakistanis who are in poverty or teetering on the edge of poverty, it is also prudent for the SBP to do whatever it can to protect citizens from price shocks. As we saw in the recent sugar fiasco, businesses’ decision-making prioritises their own growth and profitability, usually without any concern for their impact on the economy or consumers. The SBP’s job is not just to create a business-friendly environment, but to balance the needs of the business with the needs of citizens.
