The State Bank of Pakistan (SBP) is set to announce its monetary policy decision today. Over the past six reviews, the central bank has slashed interest rates by a cumulative 1,000 basis points (bps), bringing the policy rate down to 12 percent.

However, the pace of easing has slowed significantly—after three consecutive cuts of 200 bps or more, the most recent reduction was a modest 100 bps cut.

The SBP has explicitly stated that evolving risks necessitate a cautious monetary policy stance to ensure price stability. Consequently, if there is any further rate cut today, it is likely to be limited to 100 bps or less.

The decision hinges on two sets of variables: inflation and economic growth on the one hand, and external account vulnerabilities on the other.

Inflation has fallen more sharply than anticipated, while GDP growth remains sluggish. Based on these factors alone, a 100-bps cut seems justified. However, the external account presents a more pressing concern.

Recent developments in the currency market indicate mounting pressure. Banks have tightened their management of inflows and outflows, leading to delays in import payments and friction in opening letters of credit (LCs).

Pakistan’s external vulnerabilities are well known, and memories of the country’s near-default situation are still fresh. Any misstep could trigger........

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