ISLAMABAD: Leading economists of the country are pessimistic about a policy rate cut, while saying that the State Bank of Pakistan (SBP) is unlikely to loosen monetary conditions in its upcoming Monetary Policy Committee (MPC) meeting scheduled for Monday, largely due to International Monetary Fund (IMF) pressure to keep rate “appropriately tight.”
Former finance minister Dr Hafeez Pasha told Business Recorder that the chances of a meaningful reduction are “very low,” though the central bank may opt for a symbolic 25 basis-point cut. He argued that Pakistan is currently relying solely on the policy rate to manage inflation, as the exchange rate—traditionally the second tool—is not being utilised.
“The rupee remains around four percent overvalued. Since the exchange rate is not being used to anchor inflation, the only option left is to keep the policy rate tight,” Dr. Pasha added.
SBP expected to retain policy rate at 11pc: analyst
Former Finance Ministry Adviser Dr Ashfaque Hassan Khan, however, said that there is room for at least a 50 basis-point reduction in policy rate. But he, too, acknowledged that IMF directives will likely prevent any meaningful easing. He criticised the Fund’s approach, saying that in countries like Pakistan—where inflation stems from supply bottlenecks rather than demand—tight monetary policy is an ineffective tool.
“In Pakistan, the issue is supply constraints, not overheating demand. Tightening works in economies facing demand-driven inflation, not in ours,” Khan said. On the exchange rate, he noted that the SBP’s procurement of around $8 billion from the market suggests that dollar supply has improved, helping stabilise the rupee.
The IMF, in its report stated that monetary policy has helped contain inflationary pressures and should remain appropriately tight and data-dependent to keep inflation within the SBP’s target range, while allowing exchange rate flexibility to absorb shocks and support continued rebuilding of reserves.
It further stated that an appropriately tight monetary policy stance has been pivotal in reducing inflation and should be maintained to ensure inflation remains anchored within the SBP’s target range. Further improvements in central bank communication will support effective monetary policy implementation.
The SBP should continue efforts to deepen the interbank foreign exchange market, while allowing exchange rate flexibility to absorb shocks. Decisive financial regulation enforcement is necessary to maintain a sound and adequately capitalized financial sector. At the same time, promoting capital market development will help expand the public and private sectors’ financing options, the Fund added.
The SBP should continue efforts to deepen the interbank FX market, while allowing exchange rate flexibility to act as the main shock absorber in the face of significant uncertainty, the Fund added.
Copyright Business Recorder, 2025