SBP to keep policy rate on hold amid inflation

KARACHI
In light of economic and geopolitical uncertainty coupled with inflation concerns, is expected to keep its key interest rate unchanged at 12% with analysts downplaying the chances of a shift until the budget for the next fiscal year (FY26) was announced and inflation risks became clearer. Most analysts and surveys from major brokerage firms have predicted that the SBP, on Monday, would keep the policy rate on hold, while some forecast a reduction of 50 basis points (bps). However, few estimate that rates would be slashed by 100bps.
If the majority are correct, that would mark the central bank’s second consecutive rate hold since it began a monetary easing cycle in June 2024. Since then, rates have been reduced by 1,000bps. The SBP kept rates unchanged at 12% during the last monetary policy meeting in March, citing risks of price increases due to higher US tariffs.
The SBP’s Monetary Policy Committee (MPC) has room to lower rates further, as inflation eased to 0.3% in April, down from 0.7% in the previous month. However, concerns about Pakistan’s economy stemming from global trade disruptions, geopolitical tensions, and inflation pressures after the upcoming budget may compel the SBP to proceed cautiously at this time. Analysts have warned that US President Donald Trump’s tariff actions could cause more harm than anticipated. Potential recessions and inflation shocks could negatively impact remittances, an essential support for Pakistan’s external current account.
Saad Hanif, head of research at Ismail Iqbal Securities, said that the MPC highlighted ongoing risks from elevated core inflation and potential increases in food and energy prices during its last meeting. The IMF has also underscored the need for sustained monetary discipline, pointing out that the full effects of previous rate cuts have yet to be felt.
“With the federal budget approaching in June, policymakers are likely to closely monitor its potential inflationary consequences. Against this backdrop, we expect the MPC to maintain the policy rate in the upcoming meeting,” Hanif said.
The SBP is likely to adopt a wait-and-see approach ahead of the IMF’s $7 billion bailout loan programme review on May 9, when it will decide whether to release the $1 billion tranche to Pakistan. In addition, the global lender will discuss a new $1.3 billion climate resilience loan.
A Tresmark poll shows 68% of traders expect no change in the upcoming monetary policy.
“Markets are rattled by trade risks, capital outflows, and a central bank that’s rightly cautious. Over $225 million has quietly exited from bonds and equities (April 2025). A cut could widen the exit door,” it said.
“That said, the growth story is buried. Export-to-GDP keeps falling. FDI is limp. If there is ever been a case for monetary stimulus, it is now.
Perhaps, the Central Bank may need to prioritise growth over caution,” it added.
Sana Tawfiq, head of research at Arif Habib Limited, anticipates a 50bps cut in interest rates, bringing them down to 11.5%. This expectation is driven by a trend of disinflation and a historically high real interest rate of 11.3%.