As the State Bank of Pakistan (SBP) prepares to announce its monetary policy decision on July 30, anticipation is running high. Markets are watching closely to see whether the central bank will deliver another interest rate cut or decide to pause. From a macroeconomic standpoint, the prudent course at this juncture is to hold steady reports The Express Tribune.

Pakistan has already undergone a dramatic monetary shift in recent months. The benchmark policy rate has been slashed from 22% to 11% as of May 2025. This sharp reversal has provided welcome relief to borrowers and offered a much-needed stimulus for economic growth. However, such adjustments take time to filter through the broader economy. Monetary easing of this scale typically requires two to three quarters before its full effects are visible across sectors.

Cutting rates again so soon would risk overheating an economy that is still absorbing the impact of previous reductions. Acting hastily at this stage could undermine the stabilisation achieved over the past year and reintroduce volatility into an already delicate recovery The Express Tribune adds.

Recent declines in year-on-year inflation to the 3–4% range have given rise to optimism. However, this reduction has largely been driven by the statistical base effect rather than a sustained slowdown in underlying price pressures. Looking ahead, several inflationary risks loom. These include prospective adjustments to energy tariffs, volatility in global commodity markets, and the potential fallout from the scaling back of remittance-linked incentives. Together, these factors could push inflation back into the 7–9% range by the end of the year.

While the SBP’s medium-term inflation target of 5–7% is both credible and desirable, the central bank must also preserve positive real interest rates — ideally in the 3–5% range — to support the current account, limit import demand, and maintain exchange rate stability. To this end, historical experience shows that dipping below this zone leads to demand-pull inflation, external imbalances, and renewed pressure on foreign exchange reserves. Pakistan cannot afford to repeat these missteps.

The third year of any macroeconomic reform programme is when political considerations begin to mount, and temporary improvements in headline indicators can create a misleading sense of security. Despite recent improvements in foreign exchange reserves, much of the support has come in the form of bilateral rollovers, multilateral disbursements, and deferred payment arrangements. This remains a fragile foundation, and the SBP would be wise not to risk it by cutting rates prematurely.

Instead, the focus should remain on consolidating recent gains through structural reforms. The government’s new National Tariff Policy (2025–30) is already helping to reduce energy costs for export-oriented sectors. If implemented effectively, lower electricity and gas prices could significantly benefit industries such as IT services, mining, value-added agriculture, and light manufacturing. These sectors have the potential to lift exports, embed Pakistan more deeply in global supply chains, and attract sustained foreign direct investment.

It is these improvements in competitiveness and productivity that should ultimately pave the way for further monetary easing. A rate cut should be earned — not by short-term gains, but by lasting improvements in fiscal discipline, external buffers, and creditworthiness.

If Pakistan continues along this path, the rewards could be substantial. Improved macroeconomic indicators could prompt global credit agencies such as Moody’s and S&P to upgrade sovereign ratings. This in turn would narrow the country’s credit default swap spreads and boost investor confidence. The successful privatisation of loss-making state-owned entities such as Pakistan International Airlines (PIA) and Zarai Taraqiati Bank Ltd (ZTBL), alongside reforms to make power distribution companies (DISCOs) financially viable, would further enhance credibility.

These structural shifts would signal genuine resilience - the kind that merits deeper policy rate reductions. Until then, the best course is caution. The SBP has taken decisive action in recent months. Now is the time to let those actions bear fruit.