by In a much-anticipated move, the State Bank of Pakistan (SBP) has announced that it will keep the key interest rate unchanged at 20.5% as it closes out the fiscal year 2024-25. The decision was made during the latest Monetary Policy Committee (MPC) meeting held on June 16, 2025, and comes amid a complex mix of inflationary concerns, fiscal tightening, and evolving global economic conditions.
Why the Rate Hold Matters
The SBP’s policy rate has remained one of the highest in the region for several quarters, aimed at curbing persistent inflation and stabilizing the currency. By choosing to maintain the status quo, the central bank is signaling a cautious but measured approach — aiming to support economic recovery without fueling further inflationary pressures.
This decision reflects the SBP’s continued commitment to striking a balance between supporting growth and maintaining macroeconomic stability. Analysts had been split on expectations, with some pushing for a rate cut in light of cooling inflation, while others expected the central bank to hold firm until clearer signals emerged from the fiscal and external fronts.
Key Factors Behind the Decision
The SBP outlined several reasons for holding the rate steady:
- Inflation Outlook: While headline inflation has eased from its peak in FY24, it remains above the SBP’s medium-term target range. Core inflation is also still elevated, which suggests underlying price pressures are yet to fully subside.
- Fiscal Consolidation: The government’s recent budget for FY26 includes tough revenue targets and reductions in subsidies, which could have inflationary implications. The SBP appears to be waiting to see how these measures play out before adjusting policy.
- External Sector Stability: The current account deficit remains manageable, and foreign exchange reserves have seen some improvement. However, the SBP remains cautious in light of global uncertainties, especially with potential U.S. interest rate changes on the horizon.
- IMF Program and Reforms: With ongoing discussions for a new long-term deal with the International Monetary Fund (IMF), the SBP is likely keeping its powder dry. A rate hold also supports Pakistan’s broader macroeconomic reform commitments.
Market Reactions
Initial reactions from financial markets have been mixed. While some investors hoped for a rate cut to spur economic activity, others welcomed the cautious tone, viewing it as a responsible approach to avoid premature loosening of monetary policy.
The Pakistan Stock Exchange (PSX) showed a modest uptick after the announcement, as investors digested the forward guidance and took comfort in policy continuity. The rupee also held firm against the U.S. dollar in early trading sessions.
Looking Ahead
The SBP has left the door open for a possible rate cut in future meetings, particularly if inflation continues to ease and fiscal reforms begin to bear fruit. However, much will depend on external financing, energy prices, and political stability as Pakistan navigates through the second half of 2025.
For now, the central bank has opted for prudence, prioritizing inflation control and financial stability — a decision that underscores the challenging balancing act faced by policymakers in a volatile economic environment.
Bottom Line:
The SBP’s decision to keep the key interest rate unchanged at 20.5% marks a cautious but strategic end to FY25. While not the rate cut some businesses were hoping for, it reinforces the bank’s commitment to inflation targeting and macroeconomic stability as Pakistan looks to restore investor confidence and lay the groundwork for sustainable growth.
