Policy rate reduction predicted with confidence by Finance Minister Aurangzeb
Pakistan's Policy Rate Likely to Decrease in Remaining Months of 2025
In a positive development for the Pakistani economy, analysts and market participants anticipate a decrease in the policy rate by 50 basis points (0.5%) in the near term, with the rate bottoming out at around 10 percent by December 2025.
This forecast is supported by several key points. Inflation in Pakistan has sharply decelerated, reaching 3.2 percent in June 2025, and is forecasted to average between 5-7 percent during FY26. The State Bank of Pakistan (SBP) has already aggressively cut the policy rate from a record 22 percent to 11 percent across 2024 and early 2025. The recent decisions in June and July 2025 to hold the rate steady are expected to gradually feed into economic recovery and lower inflation.
The SBP's Monetary Policy Committee (MPC) kept rates unchanged in its most recent meetings, reflecting caution despite easing inflation. Market and survey sentiment align with this easing view, with about 51% expecting the rate to fall to 10% by year-end, with some anticipating as low as 9%.
However, there is also prudent caution about the timing and magnitude of cuts to avoid inflation resurgence or external pressures. Some experts and analysts advise against premature further cuts, warning that the recent inflation dip may be partly due to base effects rather than a fundamental slowdown, and inflation could return to 7-9% towards the end of 2025. This scenario urges the SBP to carefully guard real interest rates to avoid overheating and maintain external stability.
Finance Minister Muhammad Aurangzeb has expressed hope that during this calendar year, there will be movement on the policy rate going south. The reduction in tariffs presents a major opportunity to boost Pakistan's exports to the US, and the finance minister has announced a deal with the United States that provides a significant opportunity for Pakistan's exporters.
The transformation in the Federal Board of Revenue (FBR) is underway, and the finance minister has signaled potential easing of Pakistan's policy rate later this year. The current account is in surplus, and there is stability in the financial sector. The size of Pakistan's economy and overall income have increased, and the finance minister has registered a record rise in remittances.
In addition, international financial organizations have lauded the government's economic reform agenda, and both S&P and Fitch have already upgraded Pakistan. The finance minister is hopeful that Moody's will also upgrade Pakistan soon. The finance minister has emphasized the need to bring taxation to a regionally competitive level without further burdening the salaried class and the manufacturing sector.
In conclusion, the consensus leans toward a moderate policy rate reduction to around 10 percent by December 2025, provided inflation remains under control and the economy stabilizes. However, there is also prudent caution about the timing and magnitude of cuts to avoid inflation resurgence or external pressures.
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