SBP stays cautious, keeps key rate at 12% amid inflation concerns

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KARACHI: The State Bank of Pakistan (SBP) placed its key policy rate at 12 % on Monday, which fought the deduction despite cooling inflation, as it depends on a possible increase in prices pressure in March and May.

The decision was made by a delegation of the Senior Level International Monetary Fund (IMF) after reviewing Pakistan’s $ 7 billion bailout package, after discussing new income targets and tax imposing measures that could affect inflation and monetary policy.

The Central Bank’s Monetary Policy Committee (MPC) called for scope for the economic approach and, after full consideration, chose to maintain the policy rate 12 %.

The committee noted that inflation decreased lower than expected in February 2025, the main reason for the decline in food and energy prices.

He said in a statement, “Despite this fall, the committee estimated the dangers posed by the hereditary fluctuations in these prices, which has increased the current declining trend in inflation.”

The committee observed that the current account, which has been in the surplus for the past few months, suffered a $ 0.4 billion loss in January 2025. “This, combined with weak financial arrivals and debt payments, led to a reduction in SBP’s foreign exchange reserves.”

Financial status was driven by a massive manufacturing output reduction in H1FY25, reduction of tax revenue in January and February, and global economic uncertainty during tariffs.

“At the same time, the basic inflation is proving to be more permanent at a high level, and thus the rise in food and energy prices can increase inflation.

“Meanwhile, economic activity continues, as the latest high frequency appears in the economic indicators.”

In addition, the SBP’s financial panel found that there was some pressure on the external account due to increasing imports between weak financial arrivals.

On balance, the committee assessed the current real interest rate to be properly positive on the future basis to maintain the current economic stability.

It reaffirmed the importance of maintaining a cautious monetary policy stance to stabilize inflation in the target range of 5-7 %. To achieve sustainable economic growth, with structural improvement, it is important.

The Central Bank’s softening cycle, which is the most aggressive in emerging markets, follows a series of a decrease in the rate of 1 thousand twenty points (BPS) in the six months, which has increased the key rate in January to 12 %, which is less than 22 % record in June.

In January, inflation declined 2.4 % – which is the lowest in nine years – and is expected to decrease by 2.2 % in February, which will support further ease.

However, the risks remain as the basic inflation is still high, the current account deficit is widespread, and market production is increasing, suggesting that SBP can reduce the rate of cutting, according to analysts.

With stability in inflation but external pressure remains, analysts believe that SBP is nearing the end of its rate coating cycle and may move to a more data -driven approach in the coming months.

If the IMF review is approved before the budget is unveiled in June, Pakistan can open more trinity of the fund, as it pursues essential economic reforms through the IMF program.

Expecting a moderate increase from March to May, some analysts believe that the central bank will stop due to a possible inflation rise when the rates will reach 10.5 percent to 11 %.

Ahmad Mobin, a senior economist at S&P Global, said an average of 6.1 percent inflation for 2025.

Despite the “sharp drop” in the Consumer Price Index (CPI), he said that urban basic inflation, which indicates prices pressure, was higher at 7.8 %.

Under the $ 7 billion IMF bailout, Pakistan’s $ 350 billion economy increased by 0.92 percent in the first quarter of fiscal year 2024-25, ending in June.