SBP Cautions on Rate Cuts, Links Easing to Flood Impact & IMF Review

Jameel Ahmad, Governor of the State Bank of Pakistan (SBP), announced the central bank’s “very cautious” approach to monetary policy, stating that future interest-rate adjustments will depend significantly on assessing the impact of recent devastating floods and the outcome of the ongoing International Monetary Fund (IMF) review.

The Governor’s comments were made ahead of the upcoming monetary policy meeting on October 27, coinciding with an IMF team visit for the second review of its $7 billion loan program.

Inflation Contained by Tight Policy

Governor Ahmad reaffirmed that the SBP’s extended tight monetary policy has been instrumental in bringing inflation under control. While torrential monsoon rains and subsequent floods, which affected approximately 8% of the nation’s cropped land, are driving up food prices and presenting renewed price pressures, the Governor remains optimistic about the medium-term outlook.

He stated that inflation may temporarily exceed the 5%-7% medium-term target range in early 2026 but is projected to be within the goal on average for the current and next fiscal years.

“The policy rate is positive — substantially positive — and this type of tight stance has contributed in controlling the inflation,” Ahmad said, adding that monetary and fiscal coordination is showing “good progress.” Pakistan’s inflation has cooled significantly from a record high of 38% in 2023, allowing the SBP to halve its policy rate to the current 11%.

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Bolstering Foreign Exchange Reserves and Stability

The SBP Governor confirmed the IMF loan program is “progressing well,” noting that the central bank has outperformed its targets on foreign reserves. Pakistan’s economy is successfully regaining stability two years after narrowly avoiding a debt default, with the economy now projected to expand 4.2% in the current fiscal year, up from 2.7% last year.

A key strategic achievement highlighted was the SBP’s move to purchase approximately $20 billion from the interbank market over the past three years. This action has bolstered central bank reserves, which have grown almost five times from a low of $3 billion in 2023, and ensured the foreign exchange reserves were not impacted by the recent $500 million Eurobond payment. The Rupee has remained largely unchanged since 2024, earning recognition as the most stable currency in Asia according to a Bloomberg index.

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Deepening US Ties and Cryptocurrency Legalization

Pakistan continues to see deepening cooperation with the United States, following the recent meeting between Pakistan’s leadership and President Donald Trump at the White House. The nation’s 19% tariff rate on exports to the US, the lowest in South Asia, has stimulated interest from international buyers, with textile exporters reporting “increased inquiries” for new orders.

In a move aimed at attracting fresh investment and mitigating financial risks, the government is moving forward to legalize cryptocurrency. Governor Ahmad explained that the new framework will ensure all virtual asset entrants undergo strict vetting and oversight, providing a clear strategic path for regulated market entry. This development has already drawn attention from international firms, including World Liberty Financial.

“This is a strategic move from the government side, and soon I think new players will come in,” Ahmad concluded, emphasizing that the SBP has ensured the framework “should not pose any risks from the central bank’s perspective.”

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