Staying the course to where?

The State Bank of Pakistan's latest Monetary Policy Report paints a picture of hard-won stability. Titled "Staying the Course," the August 2025 document chronicles Pakistan's dramatic economic recovery, inflation plummeting from 29% to 4.5%, foreign reserves rebuilding, and GDP growth accelerating. After slashing rates by 11% from their 22% peak, the central bank now holds steady at 11%, projecting continued success with inflation expected to remain in the 5-7% target range through FY26.

It's a compelling narrative of monetary discipline rewarded and macroeconomic stability restored. But beneath this official optimism lies a more troubling reality: Pakistan's central bank may have backed itself into an unsustainable corner, pursuing a policy stance that risks undermining the very recovery it seeks to protect.

The Recovery That Wasn't?

The MPR's headline achievements are undeniable. The current account swung to a $2.1 billion surplus in FY25, remittances hit record levels at $38.3 billion, and the fiscal deficit improved to 5.6% of GDP. These are genuine accomplishments born of coordinated fiscal consolidation and aggressive monetary tightening.

Yet the economic fundamentals reveal a more complex picture. With inflation forecasts anchored in the 5-7% range and growth projected at 3.25-4.25%, the SBP's 11% policy rate implies real interest rates of 4-7%, well above both natural rate estimates and the bank's own growth projections. This isn't prudent monetary policy; it's economic misalignment that risks choking off the very investment and consumption needed for sustainable recovery.