In Pakistan’s turbulent economic landscape, credibility becomes currency. And over the past year and a half, the State Bank of Pakistan (SBP) has quietly been building it. Where once monetary policy was dismissed as toothless, the central bank has now shown that a steady hand can calm markets, anchor expectations, and restore confidence.
On October 27, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at [11 per cent][1] — the fourth consecutive hold since May 2025. This came after a series of measured adjustments: from June 2023 to May 2025, the SBP [cut rates][2] cautiously from 22pc to 11pc. Each move was calculated, with pauses where necessary, resisting market pressure for a steep, one-off reduction.
The strategy appeared to be deliberate. Instead of succumbing to calls for a dramatic cut, the SBP moved gradually. This paid off. The rupee remained steady. Inflation bottomed out [below 1pc][3] in April 2025. And by May, [consumer confidence surged to 44.6pc][4] — the highest in four years.
True, other forces helped: lower economic growth, rollovers, controlled imports behind the rupee’s stability, and a higher base and decline in oil prices all eased the pressure. But the SBP’s measured stance significantly contributed to economic stability and strengthened the credibility of the monetary policy itself.
Walking the monetary tightrope
Going forward, however, the SBP, will confront even more structural and policy challenges. The advantage of a low base will no longer be available. Average inflation stood at just 4.5pc in FY2024, compared to a steep 24.5pc in FY2023. This implies that even modest increases in absolute prices during FY2025–26 could translate into higher inflation rates due to the elevated base effect. Early signs of this trend are already visible, with the consumer price index (CPI) inflation rising to 3.5pc in May from 0.3pc in April.
Moreover, the economic landscape is changing. The pursuit of higher growth, projected at 4.2pc in FY2025–26, alongside rising global oil prices, an increase in the petroleum development levy (PDL) from Rs70 to Rs100 per litre, and an opening economy under the new tariff policy, will all test inflation control. The rupee is likely to come under pressure. Early signs are already evident: it dropped to 283 a dollar on June 25 from 279 a dollar on April 25. The energy price hike to finance capacity payments, further catalysed by the PDL increase on top of already increasing prices, will trigger another wave of inflation. This will test the extent to which the SBP’s policy can manage price stability.
Money supply growth will be another challenge facing the SBP. Over the past 12 months (July to July), broad money (M3) in Pakistan grew by [14.31pc][5], compared to [6.25pc][6] in Bangladesh. Cash in circulation (M1) increased more in Pakistan ([15.79pc][5]) than in India ([11.96pc][7]) over the same period. In contrast, Bangladesh recorded a slight contraction of [0.01pc in M1][8] during this time. Pakistan’s real GDP growth stood at 2.6pc in FY2024-25, compared to 6.5pc and 3.9pc for India and Bangladesh, respectively. This increased liquidity, particularly cash expansion, may create inflation headwinds. The SBP must ensure effective control over the substantial expansion in money supply.
For these reasons, the central bank must exercise greater caution in its next moves. The absence of a higher base effect and the temporary benefit of a sharp decline in inflation due to the wheat crop crash will be a real test for the SBP. This phase will help distinguish the impact of tight monetary policy from exogenous factors that have temporarily produced a favourable inflation outcome.
The SBP will also face scrutiny regarding its choice of reference inflation for policy rate decisions. Recently, it relied on sticky core inflation to justify a smaller-than-expected rate cut. The higher real interest rate, reaching 10pc in April, with interest rate and CPI inflation clocking at 11pc and 0.5pc respectively, was defended form a position of core inflation. Going forward, if CPI inflation rises and converges with the current policy rate of 10pc, the SBP will face limited options. It may have to raise interest rates again to maintain positive real rates. At the same time, the IMF’s condition of sustaining a higher positive real interest rate will likely exert additional pressure for a further rate hike.
This, consequently, may hurt the run for growth. Businesses sentiments will be a key pressure to keep rates low. In these testing times, the SBP should focus on maintaining low and stable inflation rather than rushing to support growth. There are dozens of other departments and policies designed to promote growth, but only one institution is responsible for keeping inflation low and stable.
Breaking the perception that the SBP’s policies are influenced by IMF conditions will be another challenge, as it risks damaging the credibility of an independent SBP and its autonomous monetary policy. There is widespread belief that the slow reduction in the policy rate was driven by the IMF’s condition to maintain a higher positive real interest rate. While this may not appear to directly affect the SBP, it can undermine the credibility of its policies in the medium to long term. The SBP needs to strengthen its communication efforts to dispel these perceptions.
The missing link in SBP’s credibility
During our interactions with the SBP in 2022–23 on monetary policy communication, we strongly recommended that monetary policy statements include a simplified, non-technical summary to enhance public understanding and improve the transmission of monetary policy. This proposal was received favourably by the SBP’s senior leadership at the time, who expressed a clear commitment to implement the change. However, as of now, this improvement in communication strategy has yet to materialise in practice. The year 2025–26 may mark the beginning of this shift.
A more systematic engagement with the media, the inclusion of non-technical summaries explaining the reasoning behind key decisions, and a nuanced digital outreach strategy could significantly improve the SBP’s public communication, particularly regarding monetary policy. The SBP also needs to make better use of its WhatsApp channel to reach non-technical audiences through policy messaging, rather than limiting it to a static “announcement forum” for decisions. Beyond what has been decided, these platforms should also communicate (using accessible language) why the decisions have been made.
The SBP also needs to integrate artificial intelligence (AI) into its communication and engagement strategies, as well as its decision-making analysis. AI tools are increasingly supporting central banks in refining monetary and financial stability messaging, identifying communication gaps, and strengthening public engagement. Some are even using it for sentiment analysis using data from social media — going beyond traditional, periodic confidence and expectation surveys.
Interestingly, AI has emerged as a preferred tool for central banks to simplify information and enhance strategic communications. The Benchmarking Communication Survey 2024, [shows][9] that around one in five surveyed central banks’ communication departments (mainly in Europe) have already adopted AI tools to support their work. Conversational AI systems can distil lengthy, technical reports into accessible summaries for the general public. It is time for the SBP to formulate a clear policy framework for adopting such modern AI tools and channels across its operations.
[1]: https://www.dawn.com/news/1951561#:~:text=%E2%80%9CThe%20Monetary%20Policy%20Committee%20(MPC,on%20social%20media%20platform%20X. [2]: https://www.sbp.org.pk/m_policy/2025/Reports/MPR-Aug-2025.pdf [3]: https://www.brecorder.com/news/40360659 [4]: https://www.sbp.org.pk/research/CSS/Reports/2025/CCS-May-2025.pdf [5]: https://www.sbp.org.pk/ecodata/M3.pdf [6]: https://tradingeconomics.com/bangladesh/money-supply-m3 [7]: https://tradingeconomics.com/india/money-supply-m1 [8]: https://www.bb.org.bd/en/index.php/econdata/moneysupply [9]: https://www.centralbanking.com/benchmarking/communications
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