A measured easing

The State Bank of Pakistan’s decision to reduce the policy rate by 50 basis points to 10.5 per cent reflects a cautious but necessary shift in monetary strategy at a delicate juncture for the economy. After a prolonged period of tight monetary conditions aimed at taming inflation, the central bank is signaling confidence that price stability has taken hold—without abandoning vigilance against lingering risks.

Inflation’s trajectory provides the strongest justification for the cut. Headline inflation has remained within the SBP’s medium-term target range of 5 to 7 per cent during the first five months of FY26, supported by relatively benign global commodity prices and anchored expectations at home. While core inflation remains “sticky,” its gradual convergence with food and energy prices suggests that underlying pressures are no longer accelerating. In this context, maintaining an excessively restrictive policy stance would risk stifling growth without delivering commensurate gains on inflation.

Encouragingly, the real economy is showing signs of revival. High-frequency indicators point to strengthening momentum in large-scale manufacturing, supported by higher automobile, fertiliser and cement sales, alongside increased imports of machinery and intermediate goods. Private sector credit has rebounded, consumer financing—particularly for automobiles—remains robust, and consumer confidence has improved. These are precisely the channels through which a modest rate cut can reinforce recovery, lowering borrowing costs while sustaining demand.

The external position, often Pakistan’s Achilles’ heel, also appears manageable. The current account deficit has remained modest and within expectations, remittances are resilient, and foreign exchange reserves have surpassed near-term targets, aided by central bank purchases. While exports face headwinds—especially from weaker food shipments and a challenging global trade environment—lower global oil prices offer some offset by containing the import bill. On balance, the SBP’s projection of a current account deficit within 0 to 1 per cent of GDP appears credible.

Fiscal dynamics further support the decision. Early FY26 surpluses, bolstered by a sizeable SBP profit transfer and restrained expenditure growth, have eased near-term pressures. Expected savings on interest payments should provide additional breathing room. Still, the slowdown in tax collection underscores that monetary easing cannot substitute for long-delayed structural reforms, particularly broadening the tax base and addressing loss-making state-owned enterprises.

To be sure, risks remain. Global financial conditions are fluid, exports are under strain, and unemployment has been rising. These realities argue for prudence, not complacency. Yet the SBP’s move is incremental, not reckless. It preserves a still-positive real interest rate while acknowledging that the economy needs support to sustain growth in the upper range of its projected 3.25 to 4.25 per cent.

In this sense, the rate cut is less a pivot than a recalibration—one that balances price stability with the imperative of economic revival. If accompanied by credible fiscal discipline and structural reform, it can help translate macroeconomic stabilization into broader-based growth.