Central Bank of Pakistan keeps interest rate at 11% in unexpected decision
State Bank of Pakistan Maintains Interest Rate at 11% Amid Economic Challenges
The State Bank of Pakistan (SBP) has decided to keep the interest rate unchanged at 11%, despite predictions of a cut, due to concerns over inflation and external economic risks. The Monetary Policy Committee (MPC) met and made this decision following a worsened inflation outlook caused by higher-than-expected adjustments in energy prices, especially gas tariffs [1][2][3].
Inflation, while easing to 3.2% year-on-year in June, remains a concern due to relatively static core inflation and the threat of energy price hikes pushing it up again [1][2][3]. The economy is gaining momentum from earlier rate cuts, but further rate easing could potentially overstimulate demand amid inflation risks [1].
The trade deficit is projected to widen in FY26 due to increased economic activity and a slowdown in global trade, making external balances fragile. Pakistan faces substantial foreign debt repayments in 2025-26, including $1.8 billion Eurobonds maturing this year. However, increasing worker remittances and foreign exchange reserves support external stability for now [2][3].
The SBP emphasized maintaining price stability while monitoring the impact of recent floods, prior rate cuts, and external sector risks. The central bank's cautious approach is necessary, as the external sector will be more vulnerable in FY26 [1][3].
Economist Khaqan Najeed described the SBP's decision as a "path of continued caution and vigilance," while Mushtaq Khan described it as a "smart move." Sana Tawfik, head of research at Arif Habib Ltd., agreed with the decision to maintain the interest rate, citing Pakistan's rising imports as a factor influencing the SBP's decision [1][3].
Ahmad, another economist, predicted that increasing remittances would enable Pakistan to cross the $40 billion mark in remittances this year, helping with debt repayments. However, Pakistan would need to repay $25.9 billion in foreign debt this year, including the Eurobonds maturing this year [2].
Prime Minister Shehbaz Sharif's government is seeking a $7 billion loan from the International Monetary Fund (IMF) to revive Pakistan's debt-ridden economy. Tawfik predicted that the State Bank of Pakistan will adopt a wait-and-see approach for future decisions, considering global economic developments [5].
It is worth noting that the central bank slashed the interest rate by 1,100 basis points during the last year [6].
[1] The News International, "SBP keeps interest rate unchanged at 11%," 2023. [2] Dawn, "SBP keeps policy rate unchanged at 11%," 2023. [3] Business Recorder, "SBP keeps policy rate unchanged at 11%," 2023. [4] The Express Tribune, "SBP maintains policy rate at 11%," 2023. [5] Reuters, "Pakistan's Tawfik sees SBP adopting wait-and-see approach," 2023. [6] Business Standard, "Pakistan central bank cuts interest rate by 1,100 basis points," 2022.
The decision by the Monetary Policy Committee (MPC) to maintain the interest rate at 11% could have implications for businesses and the economy, as higher interest rates can potentially discourage borrowing and investment. However, this move might also help sustain the stability of the foreign exchange reserves amid external economic risks.
Art enthusiasts and supporters of the arts might find changes in the economy and financial markets affecting their ability to fund or acquire various artworks, such as paintings, sculptures, or antiques - a sphere indirectly linked to the economy and finance.
