MPS Preview: SBP to Maintain Cautious Stance

June 16, 2025 (MLN): With just hours remaining before Pakistan’s Monetary Policy Committee (MPC) meets, consensus is pointing to a status quo on the benchmark policy rate, likely holding steady at 11%.

While earlier projections hinted at potential rate cuts amid improving macroeconomic indicators, the central bank is now expected to remain cautious in light of heightened global uncertainty.

The recent flare-up between Iran and Israel has reintroduced volatility into global commodity markets, which has increased the spectre of a potential super-cycle in oil and metals.

The fact, we should not ignore that for a net oil importer like Pakistan, this presents fresh inflationary risks that may outweigh recent gains in domestic stability.

On the home front, the macro backdrop has strengthened noticeably as headline inflation cooled to 3.5% year-on-year in May 2025. Meanwhile, fiscal discipline also appears intact; the FY26 budget unveiled last week avoided excessive spending or inflationary subsidies.

External indicators continue to support the upside as Pakistan recorded a current account surplus of $1.9 billion during the first ten months of FY25. Real GDP growth also beat expectations, with fourth-quarter expansion clocking in at 5.47%, which lifted FY25 growth to 2.68%.

Despite this encouraging data, the SBP’s decision will likely hinge on emerging external risks. Not to forget, crude prices have surged 10–12% week-on-week amid heightened geopolitical tensions, with daily gains topping 6%.

Amidst this, the federal government has also increased the petrol prices w.e.f. June 16, 2025, for the next fortnight. Another brick in the wall is an adjustment in domestic energy tariffs to tackle circular debt, which may carry near-term inflationary consequences.

On the currency front, meanwhile, the Pakistani rupee has weakened modestly in recent weeks, depreciating by 0.28% against the U.S. dollar last week to close at 282.96 on June 13.

The currency has lost 1.63% since the beginning of the fiscal year and is down 1.56% calendar year-to-date.

With headline inflation falling to 3.5% in May 2025 and the policy rate held steady at 11%, Pakistan's real interest rate now stands at 7.5%, down from a peak of 11.7% in earlier months.

Survey Result:

To gauge market expectations for today’s monetary policy meeting, Mettis Global surveyed various sectors, revealing divided market sentiment.

According to the survey results, 45.5% of respondents expect the policy rate to remain unchanged at 11%, indicating expectations of a cautious stance by the central bank amid heightened global uncertainty and geopolitical risks.

An equal 45.5% anticipate a 50 basis point cut, bringing the rate down to 10.5%, citing sharply improved domestic macroeconomic indicators, particularly the cooling of inflation to 3.5% in May and a continued current account surplus.

Meanwhile, 16.7% of participants expect a more aggressive easing of 75 basis points, taking the policy rate to 10.25%, as they believe the central bank has ample room to support growth given the high real interest rate, which remains at 7.5% despite recent moderation from earlier levels of 11.7%.

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