All eyes on SBP: will interest rates bring relief or more jitters?

Ahead of the state bank of Pakistan’s (SBP) meeting tomorrow (Wednesday 30th July) to consider future interest rates, analysts are divided on the trends ahead. In the past one year since June 2024, Pakistan’s interest rates set by the SBP have come down by half, from 22 percent to 11 percent.

The change has had a positive impact on areas like sales of new cars, cement and steel sales as well as the performance of small and medium sized businesses. Together, this segment has seen an upturn due to their cost of bank borrowings being reduced considerably. This journey has coincided with a reduction in the rate of inflation in Pakistan that fell to 3.2 percent this month (July).

Supporters of a further lowering of interest rates have argued that a decline in inflation has helped to build up a case for the same. Business persons also argue that lower interest rates will help to build up a momentum across Pakistan for overall economic growth to rise, beyond less than three per cent of the GDP.

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The latest economic growth rate is roughly equivalent to Pakistan’s annual population growth rate, which according to critics, practically means that there has been no real growth of the economy.

But some economists are advising a cautious approach to future interest rates. This is largely due to two factors.

First, lowering of interest rates may increase the demand for foreign currencies, especially the US Dollar, in the local market. In return, this may then increase pressure on the Rupee and cause a devaluation. The final result of such a trend may cause a rise in inflation.

Second, Pakistan is considered a country with a lower rate of savings. Lowering interest rates will reduce the incentive for savers to place their savings in banks, for increasing the national rate of savings.

The ultimate decision on Wednesday by the State Bank of Pakistan may be influenced by Pakistan’s relations with the International Monetary Fund (IMF). Under Pakistan’s agreement with the IMF that was finalised in 2024, Pakistan’s monetary policy and interest rates have to be agreed with the IMF.

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While the government is keen to argue that inflation has come down to an all time low, there is an important factor that may change this trend. Recent heavy rains across Pakistan have already damaged the country’s standing crops.

Once the extent of this damage becomes clear in the coming months, prices of food items may rise. As the final outcome, future inflation may grow based on Pakistan’s agricultural performance.

Wednesday’s interest rates decision by the state bank of Pakistan will reflect Pakistan’s economic trends for times to come.