The State Bank of Pakistan maintained its policy rate at 11.5 percent on September 14, 2026, as monetary conditions remained influenced by seasonal credit repayments, improving foreign assets and continued risks from elevated global crude oil prices. According to the September 2026 Monthly Economic Update and Outlook, broad money, or M2, contracted by 5.3 percent between July 1 and September 11 of FY2027, compared with a 2.8 percent contraction during the same period of the previous year. The deeper contraction was mainly linked to movements in net domestic assets and seasonal repayment of private sector financing.
The decline in broad money was driven entirely by a reduction in net domestic assets, which fell by Rs3,355.4 billion during the period. At the same time, net foreign assets increased by Rs914.4 billion. The expansion in net foreign assets was supported by a contained current account deficit, financing inflows and foreign exchange purchases by the State Bank of Pakistan. The contrasting movement between domestic and foreign assets was therefore an important factor behind the overall monetary developments during the opening months of FY2027.
Government budgetary borrowing was a major contributor to the decline in domestic assets. The government recorded a net retirement of Rs2,734.9 billion during the period, compared with Rs2,373.4 billion during the corresponding period of the previous year. The continued retirement of government borrowing from the banking system reduces reliance on bank financing and can create additional room for lending to the private sector. The movement was therefore significant for overall credit conditions despite the contraction recorded in broad money.
Private sector credit also recorded a net retirement, although the movement was considerably larger than last year. Private sector credit showed a net retirement of Rs364.5 billion compared with Rs170.0 billion during the same period of the previous year. The economic update attributed the movement to seasonal repayment of working capital and commodity financing ahead of the Kharif procurement season. Because such repayments tend to occur around particular points in the agricultural and business cycle, the larger retirement this year contributed to the deeper contraction in M2.
Despite the seasonal decline in outstanding private sector financing, the overall stock of private sector credit remained higher than a year earlier. The outstanding stock was 13.0 percent above its level during the corresponding period of the previous year. This indicates that the contraction observed during the initial months of FY2027 does not necessarily represent a broad withdrawal of credit from businesses and households. Instead, the latest movement largely reflects the timing of repayments against previously extended financing.
Against this monetary backdrop, the Monetary Policy Committee kept the policy rate unchanged at 11.5 percent on September 14. The September economic update identified elevated global crude oil prices as the main risk to the inflation outlook. Higher oil prices can feed into domestic energy and transportation costs and potentially create wider price pressures. The Committee therefore maintained the existing monetary stance while assessing that it remained appropriate for keeping inflation expectations anchored.
The Monetary Policy Committee also assessed that the current policy stance would support the return of inflation towards the medium-term target range of 5 to 7 percent. Core inflation was slightly below expectations, while the policy rate remained positive in real terms. A positive real policy rate means the nominal policy rate remained above the prevailing inflation rate used for the assessment, providing continued monetary restraint even as economic activity and private sector credit conditions evolved.
The decision to maintain the policy rate also reflects concerns about second-round effects from higher energy prices. Initial increases in oil and energy costs can potentially spread into transportation, food, production and other areas of the economy if businesses pass higher costs through to consumers. Maintaining the monetary stance was therefore presented in the economic update as a means of containing such effects while also preserving external stability and supporting the recovery in private sector credit.
Developments in the equity market were comparatively stable during August. The KSE-100 Index gained 882 points, equivalent to approximately 0.5 percent, during the month and closed at 176,976 points. Market capitalisation increased to Rs19,830.2 billion. The modest increase reflected continued investor participation, with the economic update linking market sentiment partly to the sovereign rating upgrade.
The monetary and financial indicators for the opening period of FY2027 therefore show several concurrent developments. Broad money contracted more sharply than in the previous year, largely because of stronger seasonal private sector credit repayments and substantial retirement of government borrowing. At the same time, net foreign assets expanded as the external position improved and the State Bank accumulated foreign exchange. Private sector credit remained above its level of a year earlier despite the seasonal repayment cycle.
The September policy decision leaves the policy rate at 11.5 percent while global oil prices remain an important risk to the inflation outlook. The economic update indicates that the existing stance is intended to keep inflation expectations anchored, support the medium-term inflation target and maintain external stability while credit activity recovers. Financial-market conditions also remained broadly stable, with the KSE-100 Index posting a modest gain during August.
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