The State Bank’s most recent monetary policy decision, which keeps interest rates unchanged, indicates that the central bank will likely stick to its current restrictive monetary policy stance for the foreseeable future and is unlikely to change it anytime soon. The decision is influenced by the bank’s implicit worries about fiscal imbalances and delays in realising anticipated external inflows, in addition to short- to medium-term threats to the inflation forecast. According to the policy decision’s estimates, inflation had begun to decline in January. However, the “level of inflation remains high and its outlook is susceptible to risks amidst elevated inflation expectations” despite a notable slowdown last month. In order to reduce inflation down to the target range—which was revised upward in the most recent policy statement—of 5-7 percent by September 2025, the bank believes that this “warrants a cautious approach and requires continuity of the current [tight] monetary stance.” But it also states that “this assessment is contingent upon timely realisation of planned external inflows and continued fiscal consolidation.” Another sign that a tighter monetary policy may continue, at least in the short term, is the SBP’s decision to not emphasise as much as it had in the past that “the real interest rate remained significantly positive on a 12-month forward-looking basis as inflation is expected to remain on a downward path.” This evaluation is reliant on ongoing budgetary restraint and the prompt realisation of anticipated foreign inflows.
Another sign that a tighter monetary policy may continue, at least in the short term, is the SBP’s decision to not emphasise as much as it had in the past that “the real interest rate remained significantly positive on a 12-month forward-looking basis as inflation is expected to remain on a downward path.” As the price of oil continues to rise globally, friendly countries’ projected investment flows are taking longer to materialise.
Given the rising trend in global oil prices, the slowdown in the expected inflows of capital from friendly nations, and the possibility of more changes to the managed prices of fuel and electricity that could drive up prices, the inflation outlook remains risky, at least in the short to medium term. The economy and the people who are suffering from inflation would suffer greatly from any mistake made here.
