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.
Critics of easing point to risks that a rate cut could unmoor inflation expectations, widen the current account deficit, or weaken the currency. On the first count, recent inflation readings have largely reflected loosening food and energy price pressures rather than collapsing demand, and core inflation, a better gauge of underlying price-setting behaviour, has shown a stable or declining trend. With inflation expectations among households and firms moderating, the groundwork for a confidence-preserving cut has been laid. On the external front, Pakistan’s foreign exchange reserves, though not abundant by advanced-economy standards, have recovered from crisis lows and, strengthened by the International Monetary Fund’s recent board approval of the ongoing EFF programme, provide a cushion against disorderly market reactions.
The choice before the Monetary Policy Committee is not between inflation and growth, but between continued unnecessary financial repression and a calibrated loosening that respects both price and output objectives
The argument often invoked by international markets, that interest-rate differentials dictate exchange-rate moves through interest-rate parity, deserves particular attention. In theory, higher domestic interest rates relative to global peers should portend currency depreciation over time. But in Pakistan’s case, the expected depreciation implied by simple parity does not materialise in full in the forward market. The forward exchange rate quoted by banks suggests an anticipated depreciation that is significantly smaller than what a naïve interest differential would predict. This “wedge” between interest rates and expected currency moves reflects risk premia, capital-controls frictions, and liquidity preferences in a market where covered interest parity does not hold perfectly. Put plainly, Pakistani assets already price country risk, and a modest policy rate cut would not mechanically trigger a large, destabilising slide in the rupee.
Indeed, the real effective exchange rate, which adjusts the nominal currency for price differentials with major trading partners, has shown signs of modest real appreciation in recent months. A stronger REER indicates that Pakistan has not been losing competitiveness at an alarming pace; in fact, exporters have managed to hold ground despite heavy external headwinds. This context argues for caution, not complacency, in easing. A 100 basis-point cut, accompanied by active communication and judicious use of foreign-exchange facilities, can nudge real rates lower without undermining competitiveness and could arguably help the exporters.
Another critical piece of the puzzle is the broader global monetary environment. The U.S. Federal Reserve and other major central banks have signalled a shift from aggressive tightening towards more balanced stances in late 2025. The resulting compression in global risk premia and modest decline in advanced-economy rates reduce the pressure on Pakistan to cling to an outsized interest-rate cushion. In this global context, Pakistan’s real interest premium is already sufficiently high to anchor capital flows and support reserve rebuilding, leaving room to prioritise domestic growth.
Economically, Pakistan cannot afford prolonged restrictive monetary conditions. Growth remains modest, barely edging above population expansion, and structural unemployment persists. Sectors that absorb large numbers of workers, such as construction, manufacturing, and services, struggle under the burden of expensive credit. Lowering the policy rate to 10 percent would meaningfully relax financing constraints, catalyse investment planning, and encourage longer-term lending rather than short-term treasury bill speculation. Cheaper credit would also help revive segments of consumer demand that have been dormant, reactivating supply chains and encouraging job creation.
Distributional considerations further strengthen the case for easing. High interest rates disproportionately burden smaller firms and households with limited access to subsidised or long-term credit. While large corporates and sovereign borrowers can often secure financing through concessional channels or favourable terms, the broader economy pays a price in foregone investment and higher unemployment. A judicious rate cut would not only stimulate activity but also reduce the regressive incidence of current monetary conditions.
To be clear, this recommendation is not a call for indiscriminate or reckless monetary expansion. The proposed 100 basis-point cut should be framed explicitly as data-dependent and conditional, contingent on continued low and stable inflation, progress in external balances, and sustained fiscal discipline. It should be accompanied by clear forward guidance from the State Bank that underscores the optionality to pause or reverse course if adverse shocks materialise. Such communication will help anchor expectations and diminish the risk that markets interpret the cut as a departure from the central bank’s inflation objectives.
A rate cut of this size at this juncture would be a thoughtful, confidence-reinforcing step, not a gamble. It would signal that Pakistan’s macroeconomic stabilisation has reached a stage where monetary policy can responsibly shift from crisis-mode containment towards growth-supportive normalisation. It would show that the central bank is responsive to evolving data, sensitive to the real economy’s needs, and committed to its dual mandate of price stability and sustainable growth.
The choice before the Monetary Policy Committee is not between inflation and growth, but between continued unnecessary financial repression and a calibrated loosening that respects both price and output objectives. In the arithmetic of modern macroeconomics, the empirical case for a 100 basis-point cut is compelling. The risks are manageable, the timing is ripe, and the potential rewards — an enlivened economy, broader credit access, and renewed investment momentum — are too significant to ignore. Pakistan’s central bank should seize this moment to cut rates, not cling to the remnants of a crisis that has already passed.