Policy rate unchanged at 11.5%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 11.5%, even as it assessed that the macroeconomic outlook has improved from its previous meeting.

The committee noted that the outlook remains susceptible to heightened risks, particularly following the resurgence of conflict in the Middle East, and judged that the current monetary policy stance remains appropriate to guide inflation towards the medium-term target range of 5-7%.

The earlier de-escalation in regional tensions had led to a decline in global oil prices and a relative ease in supply chain disruptions, contributing to some improvement in recent economic indicators. Headline and core inflation moderated in June, though both remained elevated. High-frequency indicators pointed to a pickup in economic activity, while external account pressures stayed moderate. Taking these developments and evolving risks into account, the MPC opted for the status quo.

The committee highlighted several positive developments. SBP’s foreign exchange reserves surpassed the end-June 2026 target of $18 billion, largely due to continued FX purchases amid a small current account deficit in FY26 and the realisation of planned official inflows. Pakistan’s sovereign credit rating was upgraded to “B” by Standard & Poor’s (S&P). With substantial debt repayments in recent weeks, reserves stood at around $17.3 billion as of July 17.

Inflation expectations eased for both consumers and businesses in the latest sentiment surveys, although confidence indicators presented a mixed picture. The Federal Board of Revenue (FBR) met its revised tax revenue target for FY26. Separately, the International Monetary Fund (IMF) raised its global inflation forecasts for both calendar years 2026 and 2027 in the latest World Economic Outlook amid higher global commodity prices.

The MPC said economic activity slowed in the fourth quarter of FY26 as anticipated, due to the Middle East conflict, the surge in global energy prices and government austerity measures. However, high-frequency indicators, including satellite imagery, automobile sales, cement dispatches, fertiliser offtake and business sentiments, suggest some recovery in June. The agriculture outlook has improved somewhat, with initial estimates pointing to a significant increase in expected sugarcane output, which is likely to more than offset lower projected cotton production. Better prospects for commodity-producing sectors are expected to generate positive spillovers for services.

The MPC expects real GDP growth in the range of 3.5-4.5% during FY27. Risks from volatile global commodity prices amid renewed Middle East tensions and uncertain weather conditions, including evolving El Niño effects, could weigh on growth prospects.

Going forward, the current account deficit is expected to widen in line with the pickup in economic activity but is assessed to remain in the range of 0 to 1% of GDP in FY27. Workers’ remittances are likely to grow compared with last year’s $4.1 billion and continue financing a large part of the higher projected trade deficit. With the realisation of planned official inflows and some improvement in private flows, SBP’s FX reserves are targeted to rise to $20.20 billion by end-December 2026.

The FBR achieved its revised tax collection target of Rs13.0 trillion by the end of FY26. The primary balance is estimated to have remained in surplus for the third consecutive year, while the overall fiscal deficit turned out significantly lower than the previous year. Fiscal consolidation is expected to continue in FY27, with the primary surplus targeted at 2% of GDP and the overall fiscal deficit at 3.6% of GDP.

As of July 10, broad money (M2) growth moderated to 13.2% year-on-year from 15.2% at the time of the last MPC meeting, reflecting lower contributions from both net domestic assets and net foreign assets of the banking system. Within net domestic assets, growth in net budgetary borrowing slowed, while private sector credit growth accelerated to 14.9%, supported by easing financial conditions. The increase in credit was broad-based across working capital, fixed investment and consumer financing. Major borrowing sectors included textiles, telecommunications, and wholesale and retail trade. Reserve money growth also moderated, mainly reflecting the post-Eid reversal in currency in circulation. Robust growth in bank deposits contributed to a decline in the currency-to-deposit ratio.

Headline inflation eased to 11.1% year-on-year in June 2026 from 11.7% in the previous month. This was primarily attributable to the pass-through of the decline in global energy prices to domestic consumers, alongside a favourable electricity tariff adjustment. Core inflation also moderated to 8.4% but continues to remain elevated. Food inflation increased in June following a significant rise in prices of wheat and allied products as well as key perishable items.

Going forward, the recent increase in global commodity prices, higher input costs and domestic food price pressures are likely to keep inflation above the target range over the next few months. Inflation is subsequently projected to ease gradually and stabilise near the upper bound of the 5-7% target range by June 2027.