Finance minister eyes further cut to key policy rate from 11%

Published in Business and Finance on Monday, August 25th 2025 at 4:02 GMT by The News International
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Pakistan’s Finance Minister Considers Cutting the Policy Rate from 11 % to 10 % – A Move to Bolster Growth

In a significant development for Pakistan’s economy, the Finance Minister announced today that the State Bank of Pakistan (SBP) is “eyes‑on” a potential reduction of the policy rate from its current level of 11 % to 10 %. The move comes amid a confluence of domestic and global pressures that have left the country’s growth trajectory and inflation outlook in a delicate balance.

Why the Policy Rate Matters

The policy rate is the primary tool through which the SBP influences credit conditions, inflation, and ultimately economic activity. At 11 %, it is among the highest in the country’s recent history, a level that has been largely maintained in response to persistent inflationary pressures that have hovered above the 24 % mark over the past year. By lowering the policy rate, the government aims to ease borrowing costs for both businesses and consumers, stimulate investment, and provide some breathing room in an economy that has been struggling to achieve robust growth.

Context: Inflation, Growth, and Fiscal Constraints

Pakistan’s economy has been grappling with a mix of inflationary shocks—rising food and fuel prices—and sluggish growth. According to the latest inflation data released by the Pakistan Bureau of Statistics, the consumer price index has been on an upward trajectory, with the core inflation (excluding food and energy) also climbing. The finance ministry’s fiscal projections indicate a widening fiscal deficit, with government revenues under pressure due to lower tax compliance and a slowdown in key export sectors.

In a recent briefing, the finance minister noted that while the policy rate has been a critical lever in controlling inflation, the current economic environment—marked by a global rise in commodity prices and the aftermath of recent US Federal Reserve rate hikes—demands a more nuanced approach. “We need to strike a balance between controlling inflation and fostering growth,” the minister said, underscoring the need for a carefully calibrated rate cut.

The Mechanics of a Rate Cut

The SBP’s Monetary Policy Committee (MPC), which meets every 45 days, will be tasked with reviewing the feasibility of reducing the policy rate. A cut from 11 % to 10 % represents a 1‑percentage‑point reduction, a sizeable move that could have immediate ripple effects on the financial system. The minister emphasized that any decision would be data‑driven and take into account both domestic inflation trends and global financial conditions.

A 1‑percentage‑point cut is expected to lower the cost of borrowing across the board, from mortgages and corporate loans to bank credit lines. This could spur increased consumption and investment, thereby nudging GDP growth upward. However, the minister cautioned that a rate cut could also have a side effect: it could potentially fuel asset price inflation and widen the current account deficit if not managed prudently.

Broader Economic Strategy

The policy rate cut is not an isolated decision; it fits into a larger fiscal and macroeconomic strategy outlined by the finance ministry. Key elements of this strategy include:

Fiscal Consolidation: Aiming to reduce the fiscal deficit through targeted tax reforms and improved revenue collection mechanisms.
Currency Stabilization: Measures to strengthen the Pakistani Rupee against major currencies, thereby curbing import inflation.
Debt Management: Restructuring of external and domestic debt to ease the servicing burden.
Structural Reforms: Enhancing the business environment, streamlining regulatory processes, and promoting exports.

The finance minister highlighted that these initiatives would work synergistically with the policy rate cut to create a more resilient economic framework.

International Outlook and External Factors

The decision to cut the policy rate cannot be viewed in isolation from the global economic environment. The article linked to a report by the International Monetary Fund (IMF) noting that the global economy is facing “uncertain monetary tightening” from the US Federal Reserve, which has implications for emerging markets like Pakistan. Rising commodity prices, especially oil and food, are expected to continue exerting upward pressure on inflation. Additionally, geopolitical tensions in the region could impact trade flows.

Stakeholder Reactions

The business community has largely welcomed the possibility of a rate cut. Industry associations cited the high cost of credit as a barrier to expansion and innovation. On the other hand, the banking sector has voiced concerns about the impact on profitability, especially given the elevated interest margin that the SBP currently enjoys. The finance minister assured that any rate reduction would be accompanied by prudential safeguards to protect the financial sector’s stability.

Looking Ahead

While the policy rate cut is still under deliberation, the finance minister’s statement signals a clear intention to address the dual challenge of high inflation and stagnant growth. Analysts predict that if the SBP proceeds with the cut in the next policy meeting, the immediate effect could be a measurable lift in consumer spending and a modest uptick in investment.

The minister also indicated that the decision will be re‑examined after the fiscal year’s end, with a view to assessing the macroeconomic trajectory and adjusting the policy stance accordingly. Stakeholders will be closely monitoring the SBP’s next MPC meeting for a formal announcement.

In summary, Pakistan’s Finance Minister’s call for a reduction in the policy rate from 11 % to 10 % represents a strategic shift aimed at fostering growth while keeping inflation in check. The outcome of this deliberation will hinge on a careful assessment of both domestic economic indicators and global monetary trends, with the ultimate goal of steering the economy toward a more sustainable path.

Read the Full The News International Article at:
[ https://www.thenews.com.pk/latest/1335588-finance-minister-eyes-cut-to-key-policy-rate-from-11 ]