The Monetary Policy Committee of the State Bank of Pakistan is expected to cut the policy rate by 50 basis points (bps) to 10.5%, followed by an additional 100 bps of easing over the remainder of CY25, the brokerage firm AKD Research forecasted in its latest note.
AKD Research also anticipates the SBP to resume monetary easing, as the ease in geopolitical tensions shifts focus toward improving macroeconomic indicators. The SBP’s decision is likely to be driven by elevated real interest rates amid subdued inflation, a two-decade high current account surplus, foreign exchange reserves at a 3.3-year high, and sluggish economic activity as reflected by muted growth in large-scale industry.
The brokerage firm estimates real interest rates to stand at 8.5% for July 2025, with rates expected to remain above 6% based on a 12-month forward inflation projection. “These levels of real interest rates are sufficient to absorb any potential upside risks to our inflation outlook, particularly those stemming from supply chain disruptions caused by recent above-average rainfall,” it added.
In line with these projections, AKD Research forecasts inflation to ease to 2.5% YoY in July 2025, down from 3.2% YoY in June. The reduction in inflation is attributed to a decline in the food and housing indices. However, on a sequential basis, inflation is expected to rise by 1.4% MoM, driven by increases in transport, housing, and food indices.
“The transport index is likely to rise by 5.4% MoM, supported by a 5.8%/8.7% MoM increase in motor spirit and diesel prices, respectively,” the report noted. Additionally, the housing index is expected to see an uptick of 2.6% MoM, primarily due to higher electricity and gas charges. The removal of the Tariff Differential Subsidy (TDS) and the termination of the negative Quarterly Tariff Adjustment (QTA) are projected to raise electricity charges by 5.5% MoM.
The report also highlights a notable surge in food prices, which are expected to record their first monthly increase in the past four months. “Tomatoes, onions, chicken, and potatoes are expected to see significant price hikes,” AKD Research said, with tomatoes rising by 21.7% MoM, onions up 17.2%, chicken increasing by 14.8%, and potatoes seeing a 13.3% rise.
Looking forward, AKD Research forecasts further growth in foreign exchange reserves, buoyed by strong worker remittance inflows, lower interest payments, and improved access to international markets following credit rating upgrades. “The country reported its first current account surplus in 14 years during FY25, the highest in two decades,” AKD said, adding that the Pakistani rupee (PKR) is likely to remain strong despite the reduction in subsidies for incremental dollar handling.
The central bank’s actions, alongside structural improvements in the foreign exchange market and better governance, are expected to keep inflation and economic activity under control, supporting further monetary easing.
