Nine-year low inflation may pave way for SBP to cut policy rate further

ISLAMABAD: The State Bank of Pakistan (SBP) is widely expected to lower its benchmark interest rate by 50 basis points to 10.5 per cent at its upcoming policy meeting on Wednesday, as inflation continues to ease and external accounts show signs of improvement, according to a Reuters poll.

All 14 analysts surveyed predicted another rate cut, with nine expecting a 50 basis point reduction, the median forecast. Four analysts forecast a deeper cut of 100 basis points, while one anticipated a smaller 25 basis point adjustment.

Headline inflation slowed to 3.2 per cent in June. For the full fiscal year ending June 30, average inflation dropped to 4.49 per cent, the lowest in nine years and a sharp decline from 23.4 per cent the previous year.

With real interest rates now in positive territory, many economists believe the central bank has room to ease further. However, they also point to high government borrowing and the need to monitor potential risks closely.

Sana Tawfik, head of research at Arif Habib Limited, said the improved inflation outlook and better external position support further monetary easing. However, she cautioned that rising imports and renewed currency pressures call for a more measured, data-driven strategy.

Pakistan’s foreign exchange reserves have climbed to over $14 billion, bolstered by inflows from the International Monetary Fund under a $7 billion programme, along with bilateral support from friendly countries.

Recent pressure on the rupee has led to a renewed crackdown on informal dollar trading, as authorities attempt to curb speculation and stabilise the currency. This push for stability comes as the central bank weighs its next steps on interest rates.

The SBP began cutting rates from a record high of 22 per cent in June 2024. It delivered a total of 1,000 basis points in cuts before pausing in March 2025. A further 100 basis point cut came in May, but the bank held rates steady in June amid rising regional tensions between Iran and Israel.

Earlier this month, SBP Governor Jameel Ahmad said at the Reuters NEXT Asia summit that monetary policy would remain tight to ensure inflation stays within the central bank’s 5 to 7 per cent target. He noted that current policy measures were already having a visible impact on both inflation and the external sector.

Ahmed Mobeen, senior economist at S&P Global Market Intelligence, said the SBP is expected to ease policy further but at a slower pace in the latter half of the year, as import demand and global commodity risks remain key concerns.

Mustafa Pasha, chief investment officer at Lakson Investments, predicted that interest rates could gradually fall into the high single digits by the first half of 2026, supported by stronger economic buffers and the completion of both the national budget and the IMF’s review process.

Adding to the optimistic outlook, S&P Global recently upgraded Pakistan’s credit rating from ‘CCC+’ to ‘B-’, citing a combination of declining inflation, fiscal consolidation and improved foreign exchange reserves.

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