THE State Bank’s decision to keep its key policy rate unchanged at 11pc for the fourth monetary policy review since May aims at maintaining price stability amid resurging inflation. Headline CPI inflation rose to 5.6pc last month from 3pc in August, while core inflation remained unchanged at 7.3pc, suggesting that underlying pressures remain firm. The decision also shows that risks to the fragile recovery, particularly improvements in the external sector, continue despite some strengthening of the fundamentals. This is most evident in the external sector’s stability being sustained by strong remittance inflows and import restrictions amid stagnant exports and limited foreign private and official inflows. The remarkable growth in remittances, which spiked to over $38bn in FY25, has significantly helped take foreign exchange reserves to $14.5bn and maintain exchange rate stability through the SBP’s dollar purchases of $20bn from the market in the last couple of years.

Additionally, the monetary stance underscores the structural problems afflicting the economy — the inverse relationship between faster growth driven by imported consumption and recurring balance-of-payments crises. With the economy already projected by the SBP to grow by around 4pc this year, despite flood-related losses, any slippages or imprudent decision could push the country back into a difficult position. While the SBP’s decision was anticipated, much of the business community led by trade bodies such as the FPCCI has criticised it as anti-growth and anti-investment. The reaction is understandable, given that our borrowing costs remain significantly higher than those in the region. No doubt, elevated interest rates are a key factor discouraging new investment. But they are far from the only reason for weak private investment in the country in recent years. Structural issues, such as punitive tax rates, high energy costs, policy inconsistency and the government’s own budget constraints, have played an even greater role in depressing investment and growth. Without broader business reforms, even a substantial cut in interest rates is unlikely to spur new investment. Indeed, the bank has been cautious in its monetary policy decision-making. But, it is always better to be cautious than to regret later.

With imports resurging despite sluggish growth, the trade-off for maintaining a tighter monetary stance may be a weaker exchange rate. By continuing to pursue its current stance, the central bank has sent a clear message that it does not consider the current economic conditions strong enough to support a return to growth driven by consumption and speculative trading. Leaving this path will fuel inflation, quickly exhaust the reserves that we have built over the last couple of years and eventually force the bank to raise the rates again at the cost of hard-won economic stability. Do we really want to follow that path? Clearly not.

Published in Dawn, October 29th, 2025