Moaaz Manzoor

Market experts on Monday described the State Bank of Pakistan’s decision to keep the policy rate unchanged at 10.50 percent as a cautious step to manage near-term inflation risks, while simultaneously easing liquidity conditions to support economic activity.

Syed Zafar Abbas, Manager at Zahid Latif Khan Securities, told Wealth Pakistan that the central bank’s decision was largely influenced by seasonal inflation pressures expected in the coming months. He noted that inflation in Pakistan typically rises during Ramadan and Eid due to higher consumption and supply-side constraints, making an immediate rate cut risky despite improving macroeconomic indicators.

“Technically, Ramadan is approaching and inflation usually accelerates during this period. Even if the central bank was inclined to cut rates, this was not the right time, as upcoming inflation readings could surpass seven percent,” Abbas said. He added that stable exchange rate conditions and easing external pressures still leave room for a meaningful rate cut in future monetary policy meetings.

Muhammad Bilal Ejaz, Research Analyst at Ismail Iqbal Securities, said the Monetary Policy Committee’s decision signalled confidence that the current monetary stance remains sufficiently restrictive to anchor inflation expectations, while still allowing space for economic recovery. He noted that by holding the rate steady, the central bank avoided sending premature easing signals at a time when inflation risks had not fully subsided.

The decision surprised a large segment of the market, as most participants had been expecting a reduction of 50 to 75 basis points in the benchmark rate. According to a report by Topline Securities, the unchanged policy rate reflects the central bank’s assessment that inflation, although moderating, may temporarily remain above the medium-term target range before easing later in the year.

Alongside the rate decision, the central bank eased liquidity conditions by reducing the cash reserve requirement (CRR) for banks by 100 basis points. The daily CRR has been lowered to 3 percent, while the fortnightly requirement now stands at 5 percent. Topline Securities estimates that the move will inject around Rs300 billion into the banking system.

As banks do not earn any return on funds parked as cash reserves, analysts said the liquidity release is expected to marginally improve bank profitability and encourage greater lending to the private sector. They believe the step could help stimulate economic activity without undermining inflation control. The CRR had previously been increased in November 2021 to absorb excess liquidity during a period of elevated inflation.

Topline Securities also noted that the central bank revised its real gross domestic product growth estimate upward by 50 basis points to a range of 3.75 to 4.75 percent, citing stronger-than-expected large-scale manufacturing output and a lower-than-anticipated impact of floods on agricultural production.

On the external front, the State Bank projected that foreign exchange reserves would exceed an all-time high of over $20.2 billion by December 2026, sufficient to cover three months of imports. The projection does not include any issuance of Panda Bonds or Eurobonds, which could further strengthen reserve levels.

The central bank also expects workers’ remittances to rise to around $42 billion in fiscal year 2026, up from $38 billion last year, while the current account deficit is projected to remain in the lower half of the 0 to 1 percent of gross domestic product range.

Credit: INP-WealthPk