ISLAMABAD, July 30, 2025 — Pakistan’s Central Bank Holds Key Interest Rate at 11% Amid Rising Energy Costs The State Bank of Pakistan (SBP) announced on Wednesday that it will maintain its benchmark interest rate at 11%, resisting expectations for a cut. The decision reflects the central bank‘s caution in the face of growing inflationary pressures driven primarily by energy price hikes and the rollback of short-term electricity subsidies.
Inflation Trends Trigger Policy Caution
In June, inflation eased significantly to 3.2% year-on-year, thanks in large part to a drop in food prices. However, the central bank has projected a gradual rise in inflation over the coming months. Contributing factors include recent increases in gas tariffs, higher fuel prices, and the withdrawal of temporary electricity relief measures. Despite the current low figure, the SBP expects inflation to settle in the 5% to 7% target range in the medium term.
This inflation trajectory was a key reason the bank decided not to alter the policy rate. While lower inflation would typically support a rate cut, the expected uptick in consumer prices justified a wait-and-see approach.
Surging Imports and Trade Imbalance Risk
The latest economic data also shows that imports jumped by 11.1% in fiscal year 2024–25, reaching $59.1 billion. The increase was largely due to a 16% surge in non-oil imports, which signals heightened domestic demand. While this is a sign of economic activity picking up, it also raises concerns about the growing trade imbalance.
Looking ahead to the next fiscal year, 2025–26, the central bank anticipates a wider trade deficit. This expectation is based on slowing global trade momentum and continued high import volumes. A wider deficit would put additional pressure on the country’s external position, complicating future policy decisions.
Stronger Reserves Offer Some Relief
On the positive side, Pakistan’s foreign exchange reserves have surpassed $14 billion. This improvement stems from better financial inflows and a recent current account surplus. These reserves provide the central bank with a buffer to manage external shocks and currency pressures.
Additionally, Pakistan has recently received a sovereign credit rating upgrade, which has helped reduce its international borrowing costs. Lower Eurobond yields and reduced credit default swap (CDS) spreads reflect improved investor confidence. These developments support financial stability and give the SBP more flexibility, but not enough to ignore inflation threats.
Positive Real Rates Maintain Stability
One of the key factors behind the SBP’s decision to hold rates steady is that real interest rates—the difference between nominal rates and inflation—remain in positive territory. This means that the current monetary policy stance still supports price stability and keeps inflation expectations anchored.
By keeping the rate at 11%, the SBP believes it is balancing the need to contain inflation while not over-tightening monetary conditions. It also signals the bank’s confidence in the effectiveness of current policy tools without needing further intervention at this stage.
Tax Revenue Misses Target
On the fiscal front, the Federal Board of Revenue (FBR) collected 11.7 trillion rupees (roughly $42 billion) during FY 2024–25. This amount was 200 billion rupees short of revised projections, highlighting continued struggles in revenue generation. Tax shortfalls put additional strain on fiscal policy and reinforce the need for deeper structural reforms.
The shortfall is especially significant given Pakistan’s high public spending needs and existing debt obligations. It puts pressure on the government to expand the tax base and improve compliance, especially in underperforming sectors.
Coordinated Policies and Reforms Urged
In its policy statement, the SBP emphasized the importance of continued coordination between monetary and fiscal policy. The bank called for structural reforms, particularly in taxation and energy, to strengthen the economy’s foundations. These reforms are seen as essential for sustainable and inclusive growth over the long term.
The bank noted that macroeconomic stability depends not just on rate decisions, but also on government efforts to rationalize energy pricing, enhance tax collection, and reduce public sector inefficiencies. Without such changes, monetary policy alone cannot ensure long-term prosperity.
Quick Summary Table
| Indicator | Details |
|---|---|
| Interest Rate | Held steady at 11% |
| June Inflation | Slowed to 3.2% |
| Expected Inflation Target | 5% to 7% in the coming months |
| Import Growth FY 2025 | 11.1% increase, led by non-oil items |
| Foreign Reserves | Above $14 billion |
| Trade Deficit Outlook | Expected to widen in FY 2026 |
| FBR Revenue Collection | 11.7 trillion rupees, Rs 200B short |
| Real Interest Rate | Still positive |
| Sovereign Credit Rating | Recently upgraded |
| SBP Outlook | Focused on stability, coordination, reform |
✅ Final Takeaway
Despite cooling inflation in June, the SBP has chosen to maintain the interest rate at 11%, signaling a careful approach in a complex economic landscape. While improved reserves and a credit rating boost provide some breathing room, rising energy costs, increased imports, and fiscal revenue gaps remain areas of concern. With inflation likely to rise again and the trade deficit under pressure, the central bank has opted to hold steady until the picture becomes clearer.
By reinforcing the need for fiscal-monetary coordination and long-term structural reform, the SBP is emphasizing that monetary tools alone cannot sustain economic progress. It’s a cautious yet calculated move—one that aims to balance stability with reform-driven growth.
