Unchanged policy rate

The SBP surprised pundits by holding its benchmark policy rate steady at 10.5%. While most analysts expected a cut in response to an extended period of moderate inflation, the bank's Monetary Policy Committee chose to prudently strike a balance between fostering domestic growth and shielding against persistent internal and external vulnerabilities.

It is worth noting that rate cuts are usually intended to stimulate economic activity, and economic growth projections were recently revised upward based on productivity growth, without any intervention from the SBP. In this context, a rate cut could have risked overheating the economy. Also, core inflation remains naggingly high at 7.4%, compared with headline inflation of 5.6% in December.

Furthermore, the government's own finances remain precarious, as FBR tax collection is well short of its target, and a widening trade deficit could put pressure on the current account. High remittances and favourable global commodity prices are currently offsetting trade-related stressors.

The central bank has instead taken an alternative route to increasing credit availability by reducing the average Cash Reserve Requirement for banks from 6% to 5%, which will ideally inject liquidity into the economy without a broad monetary easing that could jeopardise price stability or foreign exchange reserves which, according to the bank's estimates, will surpass $18 billion by June 2026.

The rate freeze is thus best framed as a sign of cautious optimism, prioritising consolidation of recent macroeconomic gains over administering further stimulus. The decision reflects an effort to solidify the base on which sustained, durable growth will be built, hopefully providing some insulation against price fluctuations and, especially, the inevitable external shocks arising from global upheaval driven by conflict and ever-evolving trade policies of the US, Europe and other large economies.