The State Bank of Pakistan (SBP) has decided to maintain its policy rate at 11 percent, signaling a cautious approach as the economy navigates the twin pressures of post-flood recovery and inflationary risks. The Monetary Policy Committee (MPC), in its scheduled September meeting, highlighted that while certain macroeconomic indicators show encouraging stability, the extensive damage caused by recent floods has introduced new uncertainties for growth, inflation, and external accounts.
According to the MPC, inflation has moderated in recent months, while large-scale manufacturing and business confidence have shown early signs of recovery. However, agricultural losses from the floods are expected to temporarily disrupt supply chains, pushing food inflation upward and creating added pressure on the current account. As a result, the SBP has revised its GDP growth outlook for FY26 toward the lower end of the previously estimated range of 3.25 to 4.25 percent.
The MPC underlined that despite these challenges, Pakistan’s economy remains more resilient compared to earlier flood episodes. Inflationary pressures are better contained, external reserves have stabilized, and fiscal buffers are comparatively stronger. These improvements are attributed to coordinated monetary and fiscal management over the past two years. Even so, the committee emphasized the need for continued structural reforms, particularly widening the tax base and improving the efficiency of state-owned enterprises, to safeguard fiscal space in the face of heightened expenditure needs.
On the external front, SBP reserves were reported at $14.3 billion as of September 5, bolstered by steady inflows from overseas Pakistanis and expected access to international financing. While the current account deficit stood at a manageable $254 million in July, the committee acknowledged that imports of food and essential commodities could rise as a direct consequence of flood-related shortages. Looking ahead, SBP expects reserves to improve further, projecting a level of $15.5 billion by December 2025, supported by resilient remittances and planned financing inflows.
Fiscal data also reflected resilience, with Federal Board of Revenue (FBR) collections growing by 14.1 percent year-on-year in the first two months of FY26, though still slightly short of target. The MPC noted that higher petroleum levies and continued SBP transfers should support fiscal balances, with the government aiming to maintain a primary surplus. However, flood-related relief and rehabilitation efforts may elevate spending pressures, and any slowdown in growth could weigh on revenue collection.
On the monetary side, private sector credit expanded in multiple industries including textiles, telecom, and retail, reflecting improved financial conditions. Headline inflation stood at 3 percent in August, down from 4.1 percent in July. Yet, the committee warned that food prices, particularly wheat and perishables, are likely to climb in the coming months due to agricultural disruption. Inflation is now projected to temporarily exceed the 5 to 7 percent target band in the second half of FY26, before easing back toward target in FY27.
In its concluding remarks, the MPC stated that holding the policy rate steady at 11 percent reflects a balanced stance—supporting economic activity while anchoring inflation expectations and maintaining financial stability. The decision highlights SBP’s cautious approach to monetary policy as Pakistan manages the economic impact of the floods and seeks to stabilize its growth trajectory.
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