Economists urge SBP to hold rate at 11.5%

Economists have recommended that the State Bank of Pakistan (SBP) keep its policy rate unchanged at 11.5% at its upcoming monetary policy meeting on July 27.

The recommendation comes as inflation has started to ease, but underlying price pressures remain high. Analysts believe the economy is also recovering unevenly, leaving limited room for another increase in borrowing costs.

A recent economic assessment showed that headline inflation fell to 11.1% in June. However, core inflation remained elevated. Urban core inflation stood at 8.7%, while rural core inflation was recorded at 7.9%.

Economists said much of the current inflationary pressure is coming from food, energy, transport and government-controlled prices. These factors cannot be addressed effectively through interest-rate changes alone.

They also warned that a recent increase in the Sensitive Price Indicator (SPI) requires close monitoring. The development could indicate that the decline in inflation has not yet become firmly established.

Financial market indicators also support maintaining the current policy rate. Short-term Treasury bill yields remain close to the SBP’s existing rate, while the overnight interest rate is also broadly aligned with the current monetary policy stance.

However, yields on longer-term Treasury bills have increased. The six-month yield reached 11.80%, while the 12-month yield rose to 11.99%. Economists said the movement reflects some caution about the medium-term economic outlook.

The assessment noted that Pakistan’s economic recovery has gained momentum but remains uneven. Large-scale manufacturing continues to face challenges, while there are no strong signs of excessive demand that would require another rate hike.

Economists warned that raising the policy rate further could increase borrowing costs for businesses and consumers. It could also discourage investment and slow economic activity without directly tackling the supply-side factors behind current inflation.

Pakistan’s external position has improved in recent months. Higher foreign exchange reserves, strong remittance inflows and relative stability in the exchange rate have reduced immediate pressure on the economy.

Despite these improvements, risks remain. The country continues to face a sizeable merchandise trade deficit and upcoming external debt repayments. Heavy dependence on imported energy also leaves Pakistan vulnerable to international oil price fluctuations.

A sharp rise in global oil prices could increase transportation and energy costs in Pakistan. It could also widen external pressures and trigger another round of inflation.

Persistent core inflation is another major concern. If underlying price pressures remain high, inflation expectations could become difficult to control. This could delay any reduction in interest rates or force the central bank to consider tighter monetary policy.

A weakening exchange rate could create additional pressure by making imports more expensive. It could also affect foreign exchange reserves and increase imported inflation.

Economists have therefore advised the SBP to closely monitor private-sector borrowing, lending rates, monetary growth and the difference between short- and long-term interest rates.

For now, the indicators favour maintaining the policy rate at 11.5%. However, economists say the central bank should remain ready to adjust its stance if inflation, oil prices, exchange-rate pressures or external financing risks deteriorate.