SBP Holds Key Interest Rate at 11% Through End of FY25

SBP Keeps Key Interest Rate at 11% to End FY25

Published: June 16, 2025

Overview of Decision

The State Bank of Pakistan (SBP) announced today that its Monetary Policy Committee (MPC) has decided to hold the benchmark policy rate steady at 11% through the end of the current fiscal year (FY25). This decision aligns with market expectations and follows a 100 basis-point reduction in May—from 12% to 11%.

Why the SBP Hit the Pause Button

The MPC cited several key factors in its analysis:

• Inflation concerns: Inflation rose to 3.5% in May—higher than the finance ministry’s projection of up to 2%—prompting caution even as disinflation trends continue.
• Geopolitical risk: Global tensions—especially the recent Israel‑Iran crisis—have driven oil prices higher, creating imported inflation pressure.
• External vulnerabilities: Oil price volatility threatens the current account balance and could strain foreign exchange reserves.

The SBP emphasized that with global uncertainties mounting, maintaining the current rate was prudent to preserve macroeconomic and price stability.

Key Economic Indicators

A snapshot of current trends:

• Real GDP growth for FY25: Provisionally estimated at 2.7%, with a government target of 4.2% for FY26.
• Current account balance: Remained broadly in surplus through April, helped by resilient remittances.
• Foreign exchange reserves: Reached approximately $11.7 billion as of June 6, boosted by an IMF disbursement under the Extended Fund Facility.
• Fiscal stance: The FY25 primary surplus improved to 2.2% of GDP, with a FY26 target of 2.4%.

Market Reaction & Outlook

According to a Reuters poll, 11 of 14 economists forecasted the rate would remain unchanged. The consensus view was that global oil price spikes warranted caution before further easing.

However, some analysts, including those from Arif Habib Capital, argue that additional rate cuts could support growth and reduce debt servicing costs.

What Lies Ahead: FY26 and Beyond

Looking forward into FY26, the SBP stated its commitment to:

• Monitor inflation, which is expected to remain within a 5–7% range next year.
• Track global commodity prices, especially oil, due to geopolitical tensions.
• Ensure external account resilience with reserve build‑up and controlled imports.
• Align fiscal policy with structural reforms, including tax base expansion and SOE restructuring.

These measures aim to solidify macroeconomic stability while setting the stage for sustainable economic growth.

Implications for Businesses and Consumers

With borrowing costs remaining high at 11%, the following impacts are expected:

• Business investment: Continued high interest rates may restrain credit expansion and slow capital expenditures.
• Consumer finance: Mortgage and lending rates are likely to stay elevated, impacting affordability.
• Inflation outlook: Stabilization around 5–7% is likely unless external shocks intensify.
• Exchange rate: The rupee is expected to find support from rising reserves and remittances, though volatility may persist with swings in oil prices.

The SBP’s decision reflects a careful balancing act between nurturing economic recovery and guarding against emerging risks. Market participants will now watch closely for FY26’s budget execution and the influence of external developments—especially shifts in global energy markets.