Impact on Pakistan’s Economic Growth by Lowering Pakistan’s Interest Rate
OGDCL–IPRI Chair Economic Security Research Paper by Zafar Masud, Dr. Aneel Salman, Sheraz Ahmad Choudhary, and Sayem Ali — February 2026
This Economic Growth & Policy Rate 2026 Research Paper by IPRI-OGDCL Chair Economic Security examines the potential impact of lowering Pakistan’s policy interest rate on economic growth within the post-stabilisation context of 2024–2026.
Economic Growth & Policy Rate Executive Summary
This paper examines the potential impact of lowering Pakistan’s policy interest rate on economic growth within the post-stabilisation context of 2024–2026. Using recent macroeconomic data and Pakistan-specific monetary transmission evidence, the study analyses how interest rate easing affects GDP growth, inflation, private investment, employment, fiscal dynamics, and external balance.
The findings indicate that a gradual, data-dependent reduction in the policy rate can support higher economic growth by stimulating private consumption and investment, particularly in credit-sensitive industrial sectors, while easing fiscal debt-servicing pressures.
However, the relationship between policy rates and inflation is positive but lagged, and excessive or premature easing risks reigniting inflation, weakening the exchange rate, and undermining external stability. Sectoral analysis shows that industry is most responsive to monetary easing, services respond moderately with lags, and agriculture remains largely insensitive to interest rate changes.
Monetary easing can raise Pakistan’s growth toward its potential without destabilising macroeconomic conditions, whereas aggressive front-loaded cuts pose significant stability risks.
Recommendations
Drawing together the analysis above, this Economic Growth & Policy Rate paper recommends the following actions for Pakistan’s
policymakers:
- The SBP should cut rates in small, data-dependent steps, contingent on inflation remaining within
5–7% and continued improvement in external buffers, while keeping real rates modestly positive. - Core inflation should guide operational policy decisions, while headline inflation remains the
primary communication benchmark to manage expectations and transparency. - The SBP should provide regular inflation outlooks and clearly signal that easing will pause or
reverse if inflation risks re-emerge. - Maintain timely IMF and multilateral inflows, encourage FDI, closely monitor trade flows during
easing, and build reserves when conditions permit. - Use interest savings to reduce deficits or fund productivity-enhancing investment, avoid populist
subsidies, and preserve a primary surplus. - Complement rate cuts with well-targeted, time-bound refinance schemes for SMEs and priority
sectors, while gradually deepening capital markets and credit information systems. - Intensify monitoring of inflation, FX markets, capital flows, and credit trends, with regular reporting
to the MPC and continued engagement with multilateral partners. - Implement gradual, well-timed easing after disinflation to support growth while preserving
macroeconomic stability.
Conclusion
Pakistan’s optimal monetary stance is a gradual, data-dependent easing toward a modestly positive forward-looking real policy rate, calibrated to keep inflation expectations anchored while supporting recovery in credit and investment.
The State Bank of Pakistan should operationalise a dual inflation framework in which core inflation guides policy decisions, while headline inflation remains the primary benchmark for communication and accountability.
Growth can and should be supported by lower rates, but only within a clearly defined balance-of-payments ceiling that is reviewed annually and adjusted when external conditions materially change. Monetary easing must therefore proceed in tandem with continued reserve accumulation, stable capital inflows, and IMF-aligned macro discipline. At the same time, rate cuts alone are insufficient to lift potential growth; they must be sequenced with structural reforms to lower investment risk and improve productivity.
If these elements are implemented together, Pakistan can achieve higher, more durable growth without sacrificing price or external stability. A lowering of Pakistan’s interest rate, done in a calibrated manner, is expected to have a positive impact on economic growth, supporting higher output and employment.
The monetary transmission channels will ensure cheaper financing flows to businesses and consumers, thereby stimulating demand. Crucially, however, the authorities must remain ready to adjust course if needed, monetary easing is a tool, not a goal in itself.
The ultimate goal is sustainable, inclusive economic growth with low inflation. The recommended path forward is to proceed with cautious optimism: implement a gradual easing of monetary policy in tandem with disciplined fiscal management and vigilant monitoring of inflation and external metrics. This approach essentially seeks a “Goldilocks” outcome, not too hot to reignite inflation, not too cold to stall growth. By maintaining this balance, Pakistan can emulate the success of other economies that cut interest rates after stabilizing and saw their growth rates rise without sparking a new crisis.
Complete Research Paper
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