SBP Holds Policy Rate at 12%: Key Economic Concerns Highlighted

Monetary Policy Committee’s Decision to Maintain Interest Rate

The State Bank of Pakistan (SBP) has opted to keep the policy rate unchanged at 12% during its March 10, 2025, Monetary Policy Committee (MPC) meeting. The decision reflects concerns over the widening current account deficit, high core inflation, and shortfalls in tax revenue.

Despite lower-than-expected inflation in February 2025, driven by a decline in food and energy prices, the MPC cited risks related to price volatility, external account pressures, and global economic uncertainty as major factors influencing its decision. The Committee believes that the existing positive real interest rate will help sustain macroeconomic stability.

Economic Conditions and Key Concerns

Inflation Trends and Core Concerns

• Inflation in February 2025 recorded at 1.5% year-over-year, significantly lower than market expectations.
• Food and energy prices declined, but core inflation remained high, raising concerns about underlying inflationary pressures.
• The potential risk of price hikes in food and energy could push inflation upwards.

Current Account Deficit and External Pressures

• Rising imports and weak financial inflows contributed to an expanding current account deficit, which stood at $0.4 billion in January 2025.
• The cumulative current account surplus shrank to $0.7 billion for July–January FY25.
• The SBP’s foreign exchange reserves fell due to ongoing debt repayments and reduced financial inflows.
• The MPC projects foreign exchange reserves to exceed $13 billion by June 2025.

Manufacturing and Economic Activity

• Large-scale manufacturing (LSM) output fell in H1-FY25, despite a 19.1% month-on-month increase in December 2024.
• Growth in key sectors like textiles, pharmaceuticals, automobiles, and petroleum was offset by contractions in smaller manufacturing subsectors.
• Economic activity indicators, including automobile sales, petroleum consumption, cement production, and imports, signaled a slow but steady recovery.

Fiscal Sector Challenges

• The Federal Board of Revenue (FBR) missed tax collection targets for January and February 2025, increasing fiscal pressure.
• Despite improvement in primary and overall fiscal balances, meeting primary balance targets remains a challenge.
• The MPC emphasized the importance of fiscal consolidation and tax reforms to ensure sustainable growth.

Future Outlook: Economic Recovery and Policy Direction

GDP Growth and Financial Conditions

• The MPC maintained its GDP growth projection of 2.5–3.5% for FY25.
• Economic momentum is expected to increase in the second half of FY25, supported by easing financial conditions.

Impact of Global Economic Conditions

• Rising tariffs and global uncertainty could impact trade, growth, and commodity prices.
• Global central banks have slowed monetary easing, signaling a cautious economic outlook.

Agriculture Sector and Food Security

• Recent rainfall improved Rabi crop conditions, reducing risks to agricultural production.
• Satellite imagery suggests stable yields, mitigating potential food inflation risks.

SBP’s Monetary Policy Strategy: Balancing Stability and Growth

The SBP remains committed to balancing economic stability and growth by:

• Keeping interest rates positive to control inflation.
• Strengthening external buffers through foreign exchange reserves accumulation.
• Ensuring monetary stability while allowing gradual economic recovery.

Frequently Asked Questions (FAQs)

1. Why did the SBP keep the policy rate at 12%?

The SBP maintained the rate to counter risks related to core inflation, external account pressures, and fiscal challenges.

2. How does the current account deficit affect Pakistan’s economy?

A widening current account deficit weakens foreign exchange reserves, impacts exchange rates, and increases macroeconomic vulnerability.

3. What is the GDP growth forecast for FY25?

The SBP projects GDP growth between 2.5–3.5% for FY25, with economic momentum expected to improve in the second half.

4. What are the key risks to inflation in Pakistan?

The key risks include volatile global commodity prices, supply chain disruptions, and potential food and energy price increases.

5. What steps is the SBP taking to stabilize the economy?

The SBP is focusing on maintaining monetary stability, managing inflation, strengthening foreign exchange reserves, and promoting fiscal discipline.