The State Bank of Pakistan (SBP) has decided to keep its key policy rate unchanged at 12%, citing a cautious outlook on inflation and ongoing economic conditions.
In its latest Monetary Policy Statement released on March 10, 2025, the Monetary Policy Committee (MPC) noted that inflation in February 2025 was lower than expected, primarily driven by a drop in food and energy prices. However, the MPC cautioned that core inflation remains persistent at elevated levels, and an uptick in food and energy prices could lead to a rise in overall inflation.
The MPC also highlighted some economic developments since its last meeting. The current account turned into a deficit of $0.4 billion in January 2025, following a surplus in previous months.
This, combined with weak financial inflows and ongoing debt repayments, resulted in a decline in the SBP’s foreign exchange reserves. Large-scale manufacturing output also declined during the first half of FY25, despite a substantial increase in December 2024.
Additionally, the fiscal sector showed signs of improvement, with a rise in revenues, particularly non-tax revenues, and a reduction in expenditures.
On the external front, the MPC noted a broad-based acceleration in imports, leading to a reduction in the cumulative current account surplus for FY25. However, strong remittances and moderate growth in exports helped finance the elevated imports.
The MPC reaffirmed its FY25 current account balance projection and emphasized the importance of strengthening external buffers amid heightened global economic uncertainty.
Regarding fiscal matters, the MPC acknowledged the improvement in the overall and primary balance for H1-FY25, largely due to higher revenues and contained subsidies. Despite a widening shortfall in tax revenues, the Committee emphasized the need for continued fiscal consolidation and tax reforms to support macroeconomic stability.
In the money and credit sector, broad money (M2) growth remained stable at around 11.4% year-on-year, while private sector credit showed a net retirement, reflecting the easing of financial conditions and recovery in economic activity. Inflation for February 2025 decreased to 1.5% year-on-year, driven by lower prices for perishable food items and energy prices, but core inflation remained stubbornly high.
The MPC projected inflation to stabilize within the target range of 5-7%, though risks remain due to volatility in food prices, energy adjustments, and global commodity uncertainties.
The SBP’s cautious monetary policy stance continues as it aims to manage inflation and ensure macroeconomic stability while navigating global and domestic challenges.
