KARACHI: Amid evolving macroeconomic indicators and emerging risks, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to maintain the benchmark interest rate at 11 percent, signaling a cautious stance to ensure price stability and support economic recovery.
The committee observed that the external outlook remains vulnerable to several risks, primarily driven by escalating geopolitical tensions, volatility in global oil prices, potential adverse effects of proposed budgetary measures, and the possibility of shortfalls in anticipated financial inflows.
The meeting of the MPC held on Monday at SBP head office and chaired by SBP Governor Jameel Ahmed. During the meeting the committee noted that the increase in inflation in May to 3.5 percent y/y was in line with its expectation, whereas core inflation declined marginally.
Meanwhile, inflation expectations of both households and businesses moderated. However, going forward, inflation is expected to trend up and stabilize in the target range during FY26.
The committee has also emphasized the timely realization of planned foreign inflows, achievement of the targeted fiscal consolidation and the implementation of structural reforms as essential to maintain macroeconomic stability and achieve sustainable economic growth.
The MPC also assessed that economic growth is picking up gradually and is projected to gain further traction next year, supported by the still-unfolding impact of earlier policy rate cuts. At the same time, the Committee noted some potential risks to the external sector amidst the sustained widening in the trade deficit and weak financial inflows.
It was observed that some of the proposed FY26 budgetary measures may further widen the trade deficit by increasing imports. In this regard, the Committee deemed that unchanged decision appropriate to sustain the macroeconomic and price stability.
The Committee noted the following key developments since its last meeting. First, the real GDP growth for FY25 is provisionally reported at 2.7 percent, and the government is targeting higher growth of 4.2 percent for next year. Second, despite a substantial widening in the trade deficit, the current account remained broadly balanced in April. Meanwhile, the completion of the first EFF review led to the disbursement of around $1 billion, which increased the SBP’s FX reserves to $11.7 billion as of June 6.
Third, the revised budget estimates indicate the primary balance surplus at 2.2 percent of GDP in FY25, up from 0.9 percent last year. For next year, the government is targeting a higher primary surplus of 2.4 percent of GDP. Lastly, global oil prices have rebounded sharply, reflecting the evolving geopolitical situation in the Middle East and some ease in US-China trade tensions.
Taking stock of these developments and potential risks, the MPC assessed that the real interest rate remains adequately positive to stabilize inflation within the target range of 5–7 percent.
As anticipated, headline inflation increased to 3.5 percent y/y in May from 0.3 percent in April. This reversal largely reflected the phasing out of the favourable base effect from food prices, along with persistence in core inflation. In contrast, energy prices continued to remain lower than last year, mainly reflecting the impact of moderation in global oil prices.
Further, the MPC’s initial assessment indicates the recent budgetary measures to have a limited impact on the inflation outlook. Nonetheless, some near-term volatility in inflation is expected, before it gradually inches up and stabilizes within the 5-7 percent target range.
This outlook, however committee believed that, remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments.
According to provisional PBS estimates, the economy gained momentum during the second half of FY25, with real GDP growth accelerating to 3.9 percent from 1.4 percent in H1-FY25, broadly in line with the MPC’s earlier expectations, though with compositional differences.
The agriculture sector underperformed relative to FY24 due to a sizable decline in the production of major crops. In contrast, the industry and services sectors contributed to the uptick in real GDP growth, particularly in H2-FY25.
Looking ahead, the MPC anticipates the industry and services sectors to continue to drive economic growth in FY26 and this assessment is supported by the sustained momentum in high-frequency indicators, including credit to private sector, imports of machinery and intermediate goods, and business sentiments and easing financial conditions. On balance, the Committee expects real GDP growth to increase further during FY26.
According to monetary policy statement, on external front, the current account was almost balanced in April 2025, taking the cumulative surplus to $1.9 billion during July-April FY25. Imports continued to grow in line with improving economic activity; while export growth decelerated, partly due to the challenging global trade environment.
However, workers’ remittances continued to remain strong and more than offset the impact of the widening trade deficit on the current account. Based on these trends, the current account is expected to remain in surplus in FY25.
Nonetheless, the uncertain global trade environment, coupled with expected continued strong import demand, is projected to turn the current account into a moderate deficit in FY26. Meanwhile, the MPC noted that despite net financial inflows remaining weak so far, the SBP’s FX reserves are expected to increase to around $14 billion by end-June 2025.
Going forward, external outlook is susceptible to multiple risks, which mainly stem from heightened geopolitical tensions, volatility in international oil prices, possible adverse impact of proposed budgetary measures, and potential shortfalls in planned financial inflows
On Fiscal side, the revised budget estimates indicate that both the overall fiscal and primary balances improved further during FY25. This improvement came on the back of an increase in revenues and relatively contained expenditures, especially PSDP.
Copyright Business Recorder, 2025
