SBP set to ease brakes further

July 30, 2025 (MLN): The State Bank of Pakistan’s Monetary Policy Committee (MPC) is set to meet today around 4:00 PM, with market consensus firmly tilted toward a 50 basis points cut, taking the benchmark policy rate down to 10.5%.

The expected decision is backed by a favourable macroeconomic backdrop, cooling inflation, a current account surplus, declining yields, and relative currency stability.

Headline CPI eased to 3.2% in June 2025 from 3.5% a month earlier, while core inflation has also been trending down, settling at 7.5%. The government and IMF both forecast inflation to average 5–7% in FY26.

With price pressures in check, real interest rates are turning significantly positive, making room for policy easing.

On the external side, Pakistan posted a $328 million current account surplus in June, taking the full-year FY25 surplus to $2.1 billion. Thus marked a sharp turnaround from last year’s $2.1bn deficit.

S&P Global recently upgraded Pakistan’s sovereign rating to 'B-' from 'CCC+', citing sustained disinflation, fiscal consolidation efforts, and stronger external buffers.

The country’s foreign exchange reserves have risen above $14bn, bolstered by inflows under the $7bn IMF program and continued bilateral support.

The SBP began its monetary easing cycle in June 2024, gradually trimming the policy rate from a peak of 22%.

After delivering 1,000 basis points of cuts, it paused in March 2025, resumed easing with a 100bps cut in May, but held rates steady in June amid heightened geopolitical uncertainty stemming from Iran-Israel tensions.

Earlier this month, SBP Governor Jameel Ahmad, speaking at the Reuters NEXT Asia Summit, reiterated that the central bank remains committed to a “tight” policy stance aimed at anchoring inflation within the 5–7% target range, while noting that monetary tightening has already started to reflect in both inflation and external account metrics.

In the previous meeting, the MPC kept the policy rate unchanged at 11%, even as June inflation slowed to 3.2%, pushing the real interest rate to 7.8%, a level that still provides ample room for further monetary easing by the SBP.

Yields already reflect easing bias

Secondary market yields have adjusted in anticipation of policy easing. Since the June MPC meeting, yields on longer-tenor instruments (3-, 5-, and 10-year papers) have declined by 35bps, 31bps, and 30bps, respectively.

Shorter-term yields have also softened by 19–29bps across the 3- to 12-month range.

With only a 0.25% depreciation against the dollar in FYTD, the rupee has held up well, despite growing import demand. This stability gives SBP the confidence to ease without risking immediate FX market volatility.

Business community wants deeper cuts

Industrialists and business associations are lobbying hard for the central bank to take bolder steps. The call is unanimous: bring interest rates down to single digits, and do it quickly.

RCCI President Usman Shaukat urged SBP to align rates with regional peers, citing the wide gap in borrowing costs that’s hurting business growth and competitiveness.

He stressed that SMEs are bearing the brunt of expensive financing, while sky-high electricity tariffs, heavy taxation, and low labor productivity are pushing industries to the brink.

FBATI, SITE Superhighway Association, and HCSTSI echoed similar sentiments, with several leaders demanding a phased reduction to 6%. They argue that the economy is at a turning point, revival is in motion, but high interest rates are choking industrial output, delaying new investments, and raising unemployment risks.

A rate cut, they believe, would provide vital relief to the business ecosystem and help reduce the government’s ballooning interest payments, currently estimated at Rs8.5 trillion annually.

HCSTSI President Muhammad Saleem Memon noted that a meaningful reduction in the interest rate could save the government Rs1.5–2tr per year, funds that could be redirected toward social and development priorities like education, healthcare, and SME support.

The message from the business community is clear: persistently high rates are outdated in the current macro context, and monetary policy must evolve to support investment, growth, and export competitiveness.

PSX riding rate cut optimism

Investor sentiment on the Pakistan Stock Exchange (PSX) turned bullish as traders priced in a widely expected rate cut.

The benchmark KSE-100 Index surged over 500 points in intraday trade today, crossing the 138,000 mark and reinforcing optimism around a pro-growth monetary pivot.

Buying was broad-based, with gains seen across key sectors including automobiles, cement, banking, refineries, and power generation. Index-heavy names such as HUBCO, NRL, OGDC, POL, MEBL, UBL, and HBL traded in the green.

The rally reflected growing investor confidence that the central bank will begin a cycle of rate cuts, which could lower the cost of capital, spur earnings growth, and improve corporate valuations.

For equity investors, a dovish shift in monetary policy could mark the beginning of a more sustained market recovery.

Despite improving indicators, risks remain on the horizon. Rising import demand could once again pressure the current account, while fiscal slippages and slow structural reforms may weigh on the outlook.

Still, with inflation under control, external buffers in place, and the business community demanding urgent relief, the case for a measured rate cut is strong.

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