The State Bank of Pakistan (SBP) announced on October 27, 2025, that the benchmark interest rate remains unchanged at 11.00%, matching market expectations and continuing the pause initiated in May 2025. This decision follows a series of rate cuts from a peak of 13.00% in December 2024, reflecting a cautious approach amid persistent inflation and external pressures.

Drivers this month

• Inflation steady at 9.50% YoY, down from 11.20% in Q1 2025 but still above the 6% target.
• Core inflation components such as food and energy prices remain elevated.
• External account pressures persist with a current account deficit of 3.80% of GDP in Q3 2025.
• Fiscal deficit widened to 7.10% of GDP in FY2025, limiting monetary policy flexibility.
• Geopolitical tensions in the region add risk to investor sentiment and capital flows.

Policy pulse

The SBP’s decision to hold rates steady signals a balanced policy stance. The central bank remains vigilant on inflation risks while supporting fragile economic growth, which slowed to 3.20% YoY in Q2 2025 from 4.00% in 2024. The pause allows assessment of lagged effects from prior tightening and external shocks.

Market lens

Immediate reaction: The PKR/USD exchange rate stabilized near 285.50 post-announcement, with the 2-year government bond yield steady at 12.30%. Breakeven inflation swaps for the next 12 months edged down slightly to 8.70%, reflecting tempered inflation expectations.

Core macroeconomic indicators underpin the SBP’s decision and provide context for Pakistan’s monetary policy trajectory. Inflation, growth, fiscal health, and external balances remain key metrics to watch.

Inflation and growth

• Headline inflation eased to 9.50% YoY in September 2025 from 10.10% in August, driven by softer food inflation.
• GDP growth moderated to 3.20% YoY in Q2 2025, down from 4.00% in 2024, reflecting subdued private investment and export challenges.
• Unemployment rate held steady at 7.40%, with labor market slack limiting wage pressures.

Fiscal policy and government budget

• The fiscal deficit widened to 7.10% of GDP in FY2025, up from 6.50% in FY2024, due to higher subsidies and debt servicing costs.
• Public debt remains elevated at 75% of GDP, constraining fiscal space and increasing reliance on monetary financing.
• Tax revenue collection improved modestly by 4.20% YoY but remains below targets.

External sector

• Current account deficit stood at 3.80% of GDP in Q3 2025, slightly narrower than 4.20% in Q2 2025, supported by remittances and improved textile exports.
• Foreign exchange reserves remain low at $9.30 billion, covering just 2.50 months of imports.
• Geopolitical risks and global commodity price volatility continue to pressure the external balance.

Market lens

Immediate reaction: The PKR/USD pair showed minimal volatility, closing near 285.50, while 2-year yields held steady at 12.30%. Inflation breakevens declined slightly, signaling market confidence in inflation moderation but caution on growth prospects.

Looking ahead, Pakistan’s monetary policy will navigate a complex environment of inflation risks, fiscal constraints, and external uncertainties. The SBP’s forward guidance emphasizes data dependency, with scenarios ranging from further easing to tightening depending on inflation and growth dynamics.

Bullish scenario (20% probability)

• Inflation falls below 7% by mid-2026 due to improved food supply and stable energy prices.
• Fiscal consolidation efforts reduce deficit below 6% of GDP.
• External sector stabilizes with reserves rising above $12 billion.
• SBP resumes rate cuts to support growth, potentially lowering rates to 9.50% by year-end 2026.

Base scenario (60% probability)

• Inflation remains around 8-9% through 2026, with moderate volatility.
• Fiscal deficit narrows slightly but remains above 6.50% of GDP.
• External pressures persist but are manageable with IMF support.
• Monetary policy remains on hold or tightens marginally if inflation spikes.

Bearish scenario (20% probability)

• Inflation accelerates above 10% due to supply shocks or currency depreciation.
• Fiscal deficit widens beyond 7.50% of GDP amid political instability.
• External reserves fall below $8 billion, triggering balance of payments stress.
• SBP forced to hike rates above 12% to defend currency and anchor inflation expectations.

Pakistan’s interest rate decision in October 2025 reflects a cautious central bank balancing inflation control with growth support amid fiscal and external challenges. The pause at 11.00% follows a year of gradual easing from 13.00%, signaling confidence in moderating inflation but readiness to act if risks materialize.

Structural reforms to improve fiscal discipline, enhance export competitiveness, and stabilize the external sector remain critical for long-run macro stability. Geopolitical risks and global commodity volatility will continue to shape the policy environment.

Investors and policymakers should monitor inflation trends, fiscal consolidation progress, and external balances closely to anticipate the SBP’s next moves.