KARACHI/ISLAMABAD: As the State Bank of Pakistan (SBP) prepares for its upcoming Monetary Policy Committee (MPC) meeting on Monday, growing geopolitical tensions with India are emerging as a potential factor that could shape the outcome. Despite a significant drop in inflation and persistently high real interest rates, opinions remain split on whether the central bank will reduce the policy rate — or maintain a cautious stance.
The business community continues to press for a sharp rate cut to revive economic activity, citing April’s exceptionally low inflation of 0.3%. Yet some analysts argue the tense regional situation could lead the SBP to hold rates steady, anticipating possible price shocks if the crisis escalates.
During its last meeting, the SBP surprised many by leaving the policy rate unchanged at 12%, disappointing businesses that had hoped for a substantial cut of 500 basis points. Analysts this time are once again divided: while many expect a modest 50bps reduction, others predict a status quo, especially in light of recent India-Pakistan friction following the Pahalgam incident.
A survey by Topline Securities revealed that 69% of market participants expect a 50bps cut, while 31% foresee no change. “We believe the central bank will maintain the status quo,” Topline noted, pointing to the uncertain geopolitical backdrop.
Meanwhile, Reuters’ poll of 14 analysts and investors found that nine expect no change, three anticipate a 50bps cut, and two predict a 100bps reduction.
Despite inflation cooling — with April’s Consumer Price Index (CPI) dropping to 0.29% year-on-year and core inflation at 7.4% — the SBP may tread carefully. Analysts say the over 11% real interest rate is unusually high and undermines growth, but concerns over capital flight, currency stability, and regional instability weigh heavily.
A poll by Tresmark, a global financial data platform, found that 68% of traders expect the SBP to hold rates steady. The report noted that while macroeconomic conditions support a rate cut, the risk of capital outflows — with over $225 million exiting local bonds and equities in April — could deter the central bank from acting.
“The export-to-GDP ratio continues to decline, FDI remains weak, and economic momentum is stalling. If ever there was a case for monetary stimulus, it’s now,” said Tresmark CEO Faisal Mamsa.
Business Leaders Urge Aggressive Rate Cuts
Leaders from Pakistan’s business community are increasingly vocal in their demand for a significant rate cut. Ahsan Zafar Bakhtawari of the United Business Group (UBG), part of the FPCCI, called for a 400bps cut to bring the interest rate down to 8%, alongside a reduction in electricity tariffs to Rs26 per unit.
“With inflation at historic lows, a single-digit interest rate is not only justified — it’s essential for economic coherence,” Bakhtawari said at a business forum in Islamabad.
He stressed that a lower interest rate would reduce borrowing costs, encourage investment, and stimulate economic activity, warning that failure to act could lead to industrial stagnation and rising unemployment.
The Rawalpindi Chamber of Commerce and Industry (RCCI) echoed these concerns. President Usman Shaukat said the current high interest rate regime is stifling growth and needs urgent correction. “Pakistan currently has the highest interest rate in the region. This is a major obstacle to industrial expansion and sustainable economic development,” he said.
While inflation trends support monetary easing, the final decision will likely balance growth imperatives with external vulnerabilities and geopolitical uncertainties — making Monday’s SBP announcement one of its most closely watched in recent times.
