With the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) set to meet on July 30, a growing share of market participants now anticipate a cut in the policy rate. A recent poll shows that 56% expect a reduction of 50-100 basis points (bps), up from 44% in the previous survey. Meanwhile, the proportion expecting no change has declined to 37% from 56%. According to a report by Top Line Securities.
At the last MPC meeting, the SBP kept the policy rate unchanged at 11%. The decision was shaped by uncertainties surrounding the federal budget as well as external risks, particularly the Iran-Israel conflict, which had driven global oil prices higher.
Now, expectations of monetary easing are gaining momentum, driven by a sharp moderation in inflation and a notable drop in secondary market yields. Analysts estimate that the central bank has room to cut rates by up to 100bps, with a 50bps reduction likely at the upcoming meeting.
The real interest rate defined as the policy rate minus inflation remains historically high. With FY26 inflation projected to average between 5-7%, real rates currently fall in the 400-600bps range, compared to the long-term norm of 200-300bps. July inflation is expected to be in the range of 3-3.5%, with forecasts suggesting it will remain between 3-5% through January 2026, and rise to 6-8% between February and June 2026.
Meanwhile, financial markets are already signaling expectations of easing. Since the last policy announcement, yields on six-month KIBOR and Treasury bills have declined by 10-39bps. The 6-month KIBOR now stands at 10.99%, while Treasury bills of the same tenor are trading at 10.75%.
Participants in the same poll were also surveyed on year-end expectations for interest rates, inflation, and the exchange rate. On the policy rate, 51% expect it to fall to 10% by December 2025, while 32% project a further drop to 9%.
On inflation, 54% of respondents believe it will remain in the 6-8% range during FY26, while 27% expect it to fall between 4-6%. These expectations are broadly aligned with the government’s FY26 inflation target of 7.5% and the International Monetary Fund’s forecast of 7.7%.
The currency outlook also reflects a stable to mildly depreciating trend. A majority 51% see the rupee settling between Rs285-290 per US dollar by December 2025. Additional clusters of 15% each expect the exchange rate to fall into the 290-295, 295-300, or above-300 ranges. Forecasts suggest the rupee may reach Rs288-292 by year-end and drift further to Rs298-302 by June 2026.
With inflation easing, secondary yields softening, and real interest rates well above historical norms, expectations are firmly tilted toward a rate cut with a 50bps reduction viewed as the most probable outcome.
