The State Bank of Pakistan’s Monetary Policy Committee (MPC) announced its latest decision to keep the policy rate unchanged at 11 percent. The move, in line with market expectations, reflects a careful balancing act between supporting the country’s recovering economic momentum and addressing potential inflationary and external risks.
The committee noted that inflation in May 2025 rose to 3.5 percent year-on-year, largely in line with projections. Core inflation, however, declined slightly, and inflation expectations among households and businesses showed signs of easing. Looking ahead, inflation is expected to increase modestly but stabilize within the central bank’s medium-term target range of 5 to 7 percent during FY26.
The MPC also assessed that the economy is gaining traction, driven by earlier policy rate cuts and a gradual rebound in business activity. However, it expressed caution about potential risks to the external sector. A widening trade deficit and weak financial inflows are key concerns, and certain budgetary measures proposed for FY26 could further drive imports, exacerbating the imbalance. In light of these challenges, the MPC deemed its current policy stance suitable for maintaining both macroeconomic and price stability.
Key developments since the last MPC meeting include a provisional real GDP growth rate of 2.7 percent for FY25, with a government target of 4.2 percent for FY26. Despite a significant expansion in the trade deficit, the current account remained broadly balanced in April, aided by robust workers’ remittances. Moreover, the successful completion of the first EFF review under the IMF agreement resulted in a $1 billion inflow, raising the State Bank’s foreign exchange reserves to $11.7 billion by early June. The fiscal front also showed improvement, with the primary surplus estimated at 2.2 percent of GDP in FY25, and a higher target of 2.4 percent set for FY26.
In terms of real sector performance, the economy accelerated in the second half of FY25. Real GDP growth reached 3.9 percent, led by the industry and services sectors, while agriculture lagged due to a decline in crop production. This momentum is expected to continue in FY26, with high-frequency indicators such as private sector credit, machinery imports, and business sentiment suggesting further gains. However, subdued agricultural prospects, especially amid unfavorable Kharif crop conditions, remain a downside risk.
On the external side, the current account posted a cumulative surplus of $1.9 billion during July-April FY25. Although import growth aligned with economic recovery, exports slowed amid a challenging global environment. Remittances remained strong, providing support. Nonetheless, the outlook for FY26 includes a likely shift to a moderate current account deficit due to ongoing import demand and volatile external conditions, including geopolitical tensions and fluctuating oil prices. Despite weak financial inflows to date, SBP reserves are projected to climb to around $14 billion by the end of June 2025.
The fiscal position has improved, with higher revenues and controlled development spending. However, with a reduction in external financing, the government has turned to domestic sources for funding. The MPC emphasized the importance of timely reforms, especially in tax base expansion and state-owned enterprise restructuring, to achieve fiscal consolidation goals.
Monetary trends show a slight moderation in broad money growth, attributed to reduced net budgetary borrowing. Private sector credit has remained robust at around 11 percent, with textiles, telecom, and retail among the leading borrowers. Reserve money growth picked up due to seasonal factors, prompting liquidity injections by SBP to keep interbank rates aligned with the policy rate.
In conclusion, the SBP’s decision to hold the policy rate steady reflects a cautious yet optimistic outlook. The central bank aims to sustain economic growth while managing inflation and shielding the economy from external vulnerabilities through prudent monetary policy and structural reforms.