With inflation tamed and reserves rebuilt, the central bank is confronting a fundamentally different macroeconomic landscape than the one that shaped its earlier decision. After more than a year of emergency tightening and cautious pauses, the Monetary Policy Committee now has both the data and the credibility to cut the policy rate by 100 basis points. What was once a necessary restraint against runaway inflation has outlived its usefulness in the current macroeconomic climate. Far from reckless, a well-calibrated easing would be a responsible step towards sustaining growth, easing financial stress, and reinforcing the fragile recovery of Pakistan’s formal economy.

Until late 2024 and the first half of 2025, the story of Pakistan’s macroeconomy was dominated by the imperative to arrest spiralling prices and stabilise a deeply stressed external position. Between mid-2024 and May 2025, the State Bank of Pakistan progressively reduced the policy rate from an emergency peak in the low 20s down to 11 percent as inflation fell sharply. By late 2025, headline consumer price inflation had eased to roughly six percent year-on-year, one of the lowest readings in many years and comfortably within the central bank’s own target range. This decline in inflation created a significantly positive real policy rate, leaving monetary conditions highly restrictive relative to the headline price environment.

The real policy stance matters. With inflation trending towards the central bank’s tolerance band, maintaining an 11 percent policy rate imposes a heavy cost on investment and consumption. For Pakistan’s private sector, borrowing costs are not abstract numbers; businesses, particularly small and medium enterprises, face financing spreads that remain stubbornly high despite policy tightening. Interbank rates such as KIBOR, which determine the cost of credit across the banking system, cluster just below the policy rate but still reflect an onerous cost of capital for borrowers. These pricing dynamics discourage productive investment and tilt banks towards safer government securities, squeezing credit to the real economy.

© The Friday Times