Business leaders criticise central bank’s interest rate decision

KARACHI: The business community on Monday expressed disappointment over the State Bank of Pakistan’s (SBP) decision to maintain the policy rate at 11 per cent, warning that the move will hamper economic activity and industrial recovery.

Atif Ikram Sheikh, president of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), said the business, industrial and trade sectors are dismayed that the monetary policy continues to carry a significant premium over the Consumer Price Index (CPI), with no reduction in the key rate announced at the central bank’s monetary policy meeting on Monday.

Citing government data, he noted that inflation fell to 3.5 per cent in May 2025, yet the policy rate remains at 11 per cent, reflecting a 750basis point (bps) premium over inflation. “This makes no economic sense,” Sheikh remarked.

He explained that following consultations with stakeholders across all sectors, the FPCCI had urged a one-time rate cut of 400bps, aligning the key rate with the vision of the Special Investment Facilitation Council (SIFC) and the prime minister’s agenda for industrial growth, import substitution and exports.

Sheikh added that CPI is projected to remain between 2.0 per cent and 4.0 per cent in June and July, reinforcing the need to cut the policy rate to 7.0 per cent. “The cost and ease of doing business, along with access to finance, remain critically low compared to our export competitors. Inflation has been trending downward for months, and the only viable path to economic recovery is to support industry and exports,” he said.

President of the Karachi Chamber of Commerce and Industry (KCCI) Muhammad Jawed Bilwani also criticised the SBP’s decision, describing it as overly cautious and counterproductive, especially amid falling inflation and declining industrial competitiveness.

“The business community was hoping for a long-overdue cut to single digits to stimulate the economy, reduce business costs and support struggling industries. Instead, the SBP has ignored market indicators and dampened business sentiment at a time when the economy urgently needs a boost,” he said.

Bilwani pointed out that inflation has clearly bottomed out, with independent forecasts placing it at 6-7 per cent for FY26, while the IMF and government both expect 7.5 per cent. He argued that the SBP’s decision, based on the May inflation uptick to 3.5 per cent, was unjustified given the relatively low rate and ample room for monetary easing.

“High interest rates have made Pakistan’s industrial sector uncompetitive, with exporters losing ground internationally and domestic manufacturers struggling against cheaper imports. A rate cut would have provided critical breathing space for revival and job creation,” he added.

While acknowledging external challenges like the Iran-Israel conflict and rising oil prices, Bilwani stressed that penalising local businesses is not the answer. “Yes, external risks exist, but monetary policy should strike a balance. With fiscal tightening already underway and a contractionary federal budget, there was space for monetary support,” he said.

“Today’s decision signals hesitation at a time when bold, pro-growth action is needed. We urge the central bank to show foresight and empathy towards productive sectors. Pakistan cannot afford to suppress its growth potential any longer.”

The Korangi Association of Trade and Industry (KATI) also weighed in, calling the decision to hold the rate at 11 per cent “temporarily acceptable” given prevailing global and regional uncertainties.

KATI President Junaid Naqi cited geopolitical tensions, including the Iran-Israel conflict, and the resultant spike in oil prices and trade disruptions. These factors, he noted, necessitate a degree of caution in policymaking. However, Naqi maintained that domestic indicators support an interest rate cut. “Inflation dropped to just 3.5 per cent in May -- the lowest in years. Globally, central banks reduce rates when inflation falls to spur investment, but Pakistan has yet to follow suit,” he said.

He reiterated the business community’s consistent demand for a single-digit policy rate to lower production costs and boost export competitiveness. “Given the current challenges, the business community supports the government’s broader agenda. But we also expect industry-friendly reforms once the situation stabilises.” Naqi also warned that the recent hike in fuel prices would further strain the industrial sector by raising production costs.

He pointed out that the government has set a GDP growth target of 4.2 per cent for FY26, but achieving it would require a supportive financial environment. “Once global and regional conditions improve, we urge the State Bank to cut the policy rate by two to three percentage points in the next MPC meeting,” he said. “We recognise that today’s decision is shaped by global factors,” Naqi concluded, “but we remain hopeful that pro-industry reforms will soon follow to ensure Pakistan’s economy progresses towards sustainable growth.”