In an unprecedented policy action that has taken international markets and other domestic players by surprise, the State Bank of Pakistan (SBP) has carried one of the most aggressive interest rate cuts in its history. The policy rate has crashed from a high of 22 percent in June 2024 to 11 percent by May 2025 — a total of 1,100 basis-point reduction in less than one year. While this change reflects new-found optimism in the macroeconomic landscape, particularly the steep deceleration in inflation, it also provokes a few red flags about the sustainability of the economic trajectory of Pakistan.

The argument for cutting interest rates is intuitively appealing. Despite soaring to almost 40 percent in mid?2023 in the wake of supply shocks, exchange rate depreciation and a surge in global commodities, headline inflation has plummeted to a mere 0.3 percent in April 2025 — the lowest in over 30 years for Pakistan. This disinflation has afforded the central bank a leeway to cut borrowing costs to incentivize private-sector credit, increase investment and deliver fiscal relief through cheaper government borrowings.

Furthermore, the external sector has evidenced temporary stabilization. During July-March FY25, the current account surplus was recorded at USD 1.9 billion, supported by remittances, low import requirements and relatively stable global oil prices. The PKR is stable at around 275-285 per USD and far away from the jumpy performance in 2023. These are good tidings for a........

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