Pakistan’s central bank cautious on rate cuts, sees stable inflation

October 07, 2025 (MLN): Pakistan’s central bank remains cautious about easing monetary policy as it assesses the economic fallout from recent devastating floods and awaits the outcome of an ongoing International Monetary Fund (IMF) review, as Bloomberg reported

Governor Jameel Ahmad speaking in an interview from Islamabad, noted that renewed price pressures stemming from the floods and external funding risks could limit scope for further interest-rate cuts. “The State Bank of Pakistan remains very cautious, even after an extended tightening cycle,” he said.

Inflation, which has eased significantly from last year’s record highs, may temporarily exceed the upper bound of the central bank’s 5%-7% medium-term target range in early 2026 but is expected to stay within target on average during the current and next fiscal years, Ahmad added.

The remarks come ahead of the monetary policy meeting scheduled for Oct. 27, as an IMF team conducts its second review of Pakistan’s $7 billion loan program.

Last month, the State Bank kept its benchmark rate unchanged for a third consecutive meeting after torrential monsoon rains killed more than 1,000 people and displaced 4.2 million, damaging around 8% of cropped land and driving up food prices.

Global factors such as U.S. tariffs and supply chain disruptions are also weighing on Pakistan’s growth outlook. Despite these challenges, Ahmad credited the central bank’s tight monetary stance for helping bring inflation under control.

“The policy rate is positive  substantially positive and this type of tight stance has contributed in controlling inflation,” he said, noting improved coordination between fiscal and monetary authorities.

Pakistan’s economy is regaining stability after narrowly avoiding default two years ago, buoyed by IMF funding that helped repay debt and rebuild foreign reserves. Economic growth is projected at 4.2% for the fiscal year beginning in July, up from 2.7% last year, while inflation has cooled from a record 38% in 2023, giving the central bank room to cut its policy rate to 11%.

Ahmad said the IMF program is “progressing well,” with the central bank outperforming its foreign reserve targets. Over the past three years, the State Bank has purchased about $20bn from the interbank market, reversing its previous position as a net seller. “This was a very well-thought-out strategic move,” Ahmad said, adding that reserves were unaffected by a recent $500m Eurobond payment.

Pakistan’s foreign reserves have grown nearly fivefold from a low of $3bn in 2023, while the rupee has remained stable since 2024 making it the most stable currency in Asia, according to a Bloomberg index.

On the international front, Pakistan’s economic ties with the United States have deepened, with President Donald Trump hosting Pakistani leaders at the White House last month. The country’s 19% tariff rate on exports to the U.S. the lowest in South Asia  has boosted interest from American buyers, particularly in the textile sector.

Finance Minister Muhammad Aurangzeb said an upcoming investor conference in Washington aims to attract fresh U.S. investment in Pakistan’s oil and mining sectors. Meanwhile, the government’s move to legalize cryptocurrency has drawn attention from World Liberty Financial, a company linked to the Trump family.

Ahmad said the new regulatory framework will ensure strict vetting and oversight of all virtual asset entrants. “This is a strategic move from the government side, and soon I think new players will come in,” he said. “We have ensured that it should not pose any risks from the central bank’s perspective.”

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