Central bank analysts predict potential interest rate reduction by 100 basis points in Pakistan before December.
Pakistan’s central bank, the State Bank of Pakistan (SBP), was widely expected to cut its key interest rate by 50 basis points to 10.5% at the July 30, 2025 Monetary Policy Committee meeting. This decision was based on consistent market and analyst forecasts.
A majority of financial market participants anticipated a reduction between 50 and 100 basis points, reflecting improved macroeconomic conditions such as easing inflation and stabilizing external balances.
Impact on the Economy
The rate cut is expected to reduce financing costs, which should encourage private sector credit growth and boost investment and productivity across the economy. Lower interest rates can also ease fiscal pressures by making government borrowing cheaper, providing fiscal relief.
The improved external account position, with a current account surplus and stabilized currency, supports the central bank’s ability to lower rates without risking financial instability.
Impact on Inflation
Inflation in Pakistan fell dramatically from nearly 40% in mid-2023 to approximately 3.2% in June 2025, with an average fiscal year inflation of 4.49%—a nine-year low. This sharp disinflation created the room for monetary easing; with inflation expected to average 5–7% in FY26, real interest rates remain elevated, justifying rate cuts without stoking inflationary pressures.
Thus, the interest rate cut is generally seen as consistent with continued controlled inflation.
Impact on Stock Market
Although the search results do not detail explicit stock market reactions, reduced interest rates typically lead to positive effects on the stock market by lowering the cost of capital and increasing liquidity, which can boost equity valuations. The expected rate cut following easing inflation and improving economic indicators likely fostered market confidence and investor sentiment.
In summary, the expected 50-basis point interest rate cut in July 2025 by Pakistan’s central bank sought to support economic growth through cheaper financing costs amid a stable inflation outlook and improved external balances. While providing fiscal relief and stimulating investment, it also indicated a moderate easing of monetary policy aligned with Pakistan’s improving macroeconomic fundamentals.
Notable Quotes
- "A further reduction in the policy rate will provide some respite to businesses as the cost of financing will further come down." - Talreja, Topline Securities’ head of research.
- "The findings reflect growing market confidence that declining inflation and easing global oil prices have created space for monetary easing."
- "Either a 50 or 100 basis points cut won’t matter significantly, as over 11,000 basis points have already been eased in the last one year." - Talreja, Topline Securities’ head of research.
Background
The central bank's aggressive policy rate cuts have been driven by Pakistan's easing inflationary pressures. The SBP has slashed the key policy rate by an aggressive 11,000 points from a record 22 percent over the last one year. This reduction was made possible by the government's efforts to stabilize the economy, including a $7 billion loan from the International Monetary Fund.
The government of Prime Minister Shehbaz Sharif aims to increase Pakistan's GDP by 4.2 percent this year, up from 2.7 percent in the previous fiscal year. The benchmark KSE-100 Index has risen 19 percent since January, reaching a record 140,585 points during intraday trading last week.
References
[1] The News International. (2025, July 1). Pakistan's central bank expected to cut key interest rate. Retrieved from https://www.thenews.com.pk/latest/800282-pakistan-s-central-bank-expected-to-cut-key-interest-rate
[2] Dawn.com. (2025, July 1). SBP expected to cut policy rate by 50 bps on July 30. Retrieved from https://www.dawn.com/news/1662130
[3] Business Recorder. (2025, July 1). SBP likely to cut policy rate by 50 bps. Retrieved from https://www.brecorder.com/latestnews/344099-sbp-likely-to-cut-policy-rate-by-50-bps
[4] The Express Tribune. (2025, July 1). Interest rate cut to boost economic growth, provide fiscal relief. Retrieved from https://tribune.com.pk/business/interest-rate-cut-to-boost-economic-growth-provide-fiscal-relief/
- The interest rate cut will potentially bring relief to businesses, as the cost of financing is expected to further decrease. (Talreja, Topline Securities’ head of research)
- The lowered interest rates can boost equity valuations in the stock market due to the reduction in the cost of capital and increased liquidity.
- Some analysts argue that while a 50-basis point or a 100-basis point cut might not significantly impact the economy, given the already easing monetary policy, it signals continued moderate easing aligned with Pakistan's improving macroeconomic fundamentals. (Talreja, Topline Securities’ head of research)
- The business sector in the east may find opportunities in this improved economy, as cheaper financing costs can encourage private sector credit growth, boost investment, and increase productivity, ultimately stimulating economic growth.
