BY holding the policy interest rate steady while cutting the cash reserve requirement for banks, the State Bank appears to have clearly signalled a significant recalibration of its stance in favour of economic growth.

When a central bank reduces CRR — the amount banks have to maintain with it against their deposits — while keeping the interest rates high, it is implementing a ‘tight money, high liquidity’ policy. This indicates that it will continue targeting inflation through higher rates while boosting banks’ lending capacity by injecting additional liquidity in the system via lower reserve requirements to support growth.

Prima facie, the two actions appear to contradict each other. Indeed, the increase in money supply can push inflation. Yet, the CRR reduction is far less inflationary than a reduction in the rates.

Reserve requirements have been slashed by 100bps to 5pc on an average fortnightly basis and 3pc on a daily basis. This is expected to free up additional funds of Rs300-315bn for banks to lend. The CRR was increased in November 2021 to mop up liquidity from the market amid higher inflation levels. By reverting to the old ratio, the SBP has also indicated its comfort in the inflation outlook.

While average inflation is expected to stay within the target range of 5-7pc, the bank has revised its economic growth projection by half a percentage point to 3.75-4.75pc. Nonetheless, analysts believe that the impact of the relaxation in CRR on credit uptake and growth is likely to remain modest. The decision is unlikely to stimulate private sector demand growth very much, given banks’ aversion to risk and subdued private sector demand for expensive credit in a sluggish economy.

That said, the bank’s decision to keep the policy rate unchanged at 10.5pc is a sign of its preference for consolidation of recent gains from economic stabilisation, because recovery so far remains fragile and uneven. Despite a better external position, the widening current account deficit of $1.2bn in the first half of the fiscal year reflects continued weakness in exports. This fragility in recovery is amply explained by external weakness.

Though the current account deficit remains contained within the targeted range of 0-1pc of GDP owing largely to stronger workers’ remittances and stable global oil and commodity prices, exports are declining and foreign official and private flows shrinking. Similarly, fiscal vulnerabilities — as highlighted in the growing shortfall in the tax collection target — remain unresolved despite a decreasing interest payment burden on rate reductions.

Likewise, the growth momentum continues to rely on consumption driven by earlier monetary easing and rising remittances rather than productivity gains or competitiveness. In sum, it is better to be safe than sorry.

Published in Dawn, January 28th, 2026