Pakistan unexpectedly halts easing cycle, keeps key interest rate at 12%

Pakistan’s central bank unexpectedly halted its easing cycle on Monday, keeping its key policy rate at 12%, saying there could still be price risks including from an escalation in global tariffs even though inflation was falling for now.

The central bank had slashed rates by 1,000 bps from an all time high of 22% in June 2024, to try and revive economic growth, while navigating reforms under a $7 billion facility from the International Monetary Fund agreed in September.

The State Bank of Pakistan (SBP) said in a statement that the monetary policy committee had noted that despite a better than expected drop in the inflation rate last month, risks remained.

“Notwithstanding this decline, the Committee assessed the risks posed by the inherent volatility in these prices to the current declining trend in inflation,” the statement said.

“On the global front, uncertainty has increased significantly amidst the ongoing tariff escalations, which may have implications for global economic growth, trade and commodity prices,” the bank added.

Pakistan has been one of the most aggressive central banks among emerging markets during the current easing cycle and has topped the 625 bps in rate cuts it made in 2020 during the COVID-19 pandemic.

“On balance, the MPC (monetary policy committee) assessed the current real interest rate to be adequately positive on forward-looking basis to sustain the ongoing macroeconomic stability,” the bank said in its statement.

Ten of 14 analysts surveyed by Reuters had expected the central bank to cut its key rate, while four expected it to hold the rate. Analysts surveyed said they expect inflation may pick up in May as the base year effect wears off.

Pakistan’s consumer inflation rate slowed to a near decade low of 1.5% in February, largely due to a high year-ago base. That was below the government’s forecast and significantly lower than a multi-decade high of around 40% in May 2023.

“SBP’s decision to pause the easing cycle reflects its cautious stance amid persistent core inflation and renewed pressures from rising food and energy prices,” said Sana Tawfik, head of research at Arif Habib Ltd.

“While economic activity is gaining momentum, external account vulnerabilities, driven by increasing imports and weak financial inflows, warrant a prudent approach,” she added.

The central bank’s policy committee said on Monday it expected inflation to fall further before gradually inching up and stabilising within the SBP’s 5-7% target range.

The SBP kept its forecast of full-year GDP growth at 2.5% to 3.5% and said it expected economic activity to gain further momentum.

Pakistan’s economy grew by 0.92% in the first quarter of the fiscal year 2024-25 which ends in June.

Last week, Most analysts predict a seventh consecutive rate cut by Pakistan’s central bank on Monday, amid the first International Monetary Fund (IMF) review of a $7-billion bailout at the time of the lowest inflation in nearly a decade. The cash-strapped South Asian nation could unlock a further tranche of funding if the IMF review is approved before the budget is unveiled in June, as it pursues economic reforms mandated by the IMF programme. The central bank’s easing cycle, one of the most aggressive among emerging markets, follows a series of rate cuts totalling 1,000 basis points (bps) over six months, that took the key rate to 12%, down from a record high of 22% in June.

The latest cut, of 100 bps, was in January. February inflation stood at a near-decade low of 1.5%, largely due to a high base a year ago. A Reuters survey of 14 analysts suggests that the central bank may further reduce rates, with a median forecast for a cut of 50 bps. Of the 10 analysts expecting a rate cut, three estimated its size at 100 bps, one at 75 bps, and six at 50 bps. The rest saw no change. Most analysts expecting a rate cut believe the central bank will stop when rates hit 10.5% to 11%, due to a potential rise in inflation.

They anticipate a moderate rise from March to May. Inflation will “bottom out” in the year’s first quarter before gradually rising, said Ahmad Mobeen, senior economist of S&P Global, who anticipates average inflation of 6.1% for 2025. Despite the “sharp drop” in the Consumer Price Index (CPI), he said urban core inflation, indicative of price pressures, remained high, at 7.8%.

“The S&P Global HBL Pakistan Manufacturing PMI also indicates rising input costs, pushing manufacturers to hike prices in February 2025 at the fastest pace since October 2024,” he added. At its last policy meeting, the central bank kept its forecast of full-year GDP growth at 2.5% to 3.5%, and predicted faster growth would help boost foreign exchange reserves that had been lacklustre.

Agencies