The State Bank of Pakistan’s decision to hold the policy rate at 11 per cent reflects a clear preference for keeping real interest rates firmly positive, even as inflation edges upward on the back of flood-driven food price shocks. Policymakers are attempting to anchor inflation expectations by reinforcing their commitment to price stability, banking on credibility rather than stimulus. Headline inflation has risen to 5.6 per cent, while core inflation remains stagnant at 7.3 per cent. In the SBP’s view, this uptick is temporary and largely tied to supply-side disruptions. The monetary authorities argue that inflation will breach the upper band of the 5 to 7 per cent target range in the short term but return within limits once shocks dissipate.
In doing so, the central bank is effectively choosing between two classic policy paths: allowing the rupee to depreciate further to boost exports or using high real interest rates to stabilise expectations and maintain external confidence. The SBP has opted for the latter. By keeping rates unchanged and signalling restraint, it is encouraging currency stability and foreign capital confidence, supported by rising foreign exchange reserves despite recent Eurobond repayments. Coupled with progress on IMF programmes and easing inflation expectations among consumers and businesses, the bank appears convinced that credibility is best preserved through monetary tightening and a stable currency.
Yet this stance comes at a price. Sluggish private-sector credit demand and weak economic growth continue to weigh on employment, investment and productivity. Businesses are hesitant to borrow, manufacturing remains constrained by high input costs and agriculture faces the aftershocks of floods despite official optimism over limited crop losses. Nearly 97 million citizens live below the poverty line, and with economic growth revised to just 3 per cent, the economy is starved of momentum. Export competitiveness remains weak, and industries argue that high borrowing costs and an onerous tax regime are strangling their ability to compete globally.
A competing strategy would be to allow a measured depreciation of the rupee to improve export competitiveness and incentivise import substitution. This path, however, brings its own risks. A weaker currency could fuel inflation at a time when global commodity prices remain volatile and energy price adjustments loom. For a country with deep structural vulnerabilities and fragile sentiment, a depreciating rupee could unsettle already cautious investors and strain external account stability.
The SBP’s current course is anchored in institutional caution. By maintaining high real interest rates and a relatively firm rupee, it is attempting to control the narrative around inflation and avoid a resurgence of volatility. This approach hinges on the hope that structural reforms, prudent fiscal policy and stabilising food supplies will do enough of the heavy lifting to revive growth without requiring monetary easing.
Ultimately, this is a calculated gamble. Success will depend on whether inflation expectations stay contained while growth finds new drivers. If fiscal policy remains misaligned and structural reforms stall, monetary rigidity may deliver stability without prosperity.
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