KARACHI: Contrary to market expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided on Wednesday to keep the policy rate unchanged at 11 percent, citing emerging risks of rising inflation and a widening trade deficit.
The MPC also emphasized that inflation outlook is susceptible to multiple risks emanating from uncertain global commodity prices and trade outlook, unanticipated adjustments in administered energy prices, and potential widespread floods.
The Committee had reduced the key policy rate from 22 percent to 11 percent between June 2024 and May 2025. However, it has kept the rate unchanged at 11 percent for the past two meetings, citing concerns over a higher inflation outlook.
Addressing a press conference following the committee meeting at the SBP headquarters, Governor SBP Jameel Ahmed provided insights into the decision to maintain the policy rate. He noted that headline inflation eased to 3.2 percent year-on-year in June 2025, largely driven by a decline in food prices, while core inflation also registered a modest decrease.
However, the Monetary Policy Committee (MPC) observed that the inflation outlook has deteriorated somewhat due to larger-than-expected adjustments in energy prices, particularly gas tariffs. Despite this, inflation is expected to gradually stabilize within the target range in the coming months, he added.
The Governor also highlighted that despite no change in the key policy rate, economic activity continues to strengthen, supported by the ongoing impact of earlier policy rate cuts.
At the same time, the Committee flagged concerns over a potential widening of the trade deficit in FY26, amid stronger domestic demand and a slowdown in global trade. Considering the overall macroeconomic outlook and emerging risks, the MPC deemed the decision to maintain the status quo essential for ensuring price stability, the Governor SBP said.
He said that in view of economic developments and potential risks, the Committee assessed that the real policy rate should continue to be adequately positive to stabilize inflation in the target range of 5-7 percent.
He also emphasized on the need to continue the ongoing prudent monetary and fiscal policy mix to sustain macroeconomic stability. Moreover, the Committee reiterated its view that without structural reforms it would be difficult to achieve higher growth on a sustainable basis, he maintained.
Governor SBP also highlighted key developments. First, the SBP’s FX reserves crossed $14 billion on the back of improved financial inflows and a current account surplus. Second, the recent upgrade in Pakistan’s sovereign credit rating led to a decline in Eurobond yields and narrowed CDS spreads in international markets.
Third, inflation expectations increased slightly for consumers but declined for businesses in the latest sentiment surveys. Fourth, FBR tax revenue for FY25 was recorded at Rs11.7 trillion, which fell short of the revised estimate by around Rs200 billion.
Lastly, he mentioned that global oil prices remained volatile, whereas metal prices increased and at the same time, the impact of global trade tariffs remained uncertain, prompting central banks to maintain their cautious monetary policy stance.
According to the Monetary Policy statement, despite upward revisions in motor fuel prices and electricity tariffs, energy prices remained lower on a yoy basis. Going forward, energy inflation is expected to rise from current levels amidst the significant upward adjustment in gas tariffs, phasing out of temporary reduction in electricity tariffs (of Q4-FY25), and recent increase in motor fuel prices.
The MPC noted that y/y inflation is expected to mostly remain in the range of 5-7 percent in FY26, though it may cross the upper bound in some months.
The current account posted a surplus of $328 million in June, bringing the cumulative surplus to $2.1 billion (0.5 percent of GDP) in FY25. Workers’ remittances remained instrumental, as they more than offset the widening trade deficit.
On the financing front, a sizable portion of planned official inflows materialized in June, propelling SBP’s foreign exchange reserves beyond $14 billion.
The government has also revised estimates indicating an improvement in the fiscal position for FY25, with both the primary and overall fiscal balances (as percent of GDP) surpassing their respective targets. This improved performance was achieved through a substantial growth in both tax and non-tax revenues.
However, despite achieving around 26 percent growth, the revised FBR revenue target was slightly missed. For FY26, the government aims for further fiscal consolidation with a targeted primary surplus of 2.4 percent of GDP. Achieving this target will hinge on concerted revenue collection efforts and rationalization of expenditures. The Committee also stressed the importance of continuing with the fiscal consolidation to sustain the macroeconomic gains of the past two years.
Broad money (M2) growth accelerated to 14.0 percent y/y as of July 11, up from 12.6 percent at the time of the last MPC meeting. This was primarily led by higher contributions from NFA of the banking system due to improved FX reserves.
Meanwhile, private sector credit growth accelerated to 12.8 percent y/y, supported by easing financial conditions and improving economic activity. Notably, the expansion in credit was broad-based, with increases noted in working capital loans, fixed investment advances and consumer financing.
The key borrowing sectors included textiles, telecommunications, and wholesale and retail trade. Meanwhile, the currency to deposit ratio, which had declined in June, increased in July. As a result, the SBP had to enhance its liquidity injections to align the interbank overnight repo rate with the policy rate, which led to an increase in reserve money growth.
Reuters adds: Central bank left its key interest rate unchanged at 11% on Wednesday, saying the outlook for inflation had deteriorated due to energy prices, surprising analysts who had expected another cut.
The Monetary Policy Committee of the State Bank of Pakistan said in a statement that energy prices, particularly for gas, had risen more than expected.
The panel also noted that the trade deficit was expected to widen further in the fiscal year ending June 2026, amid a pickup in economic activity and a slowdown in global trade.
“The inflation outlook has somewhat worsened,” it said. “Given this macroeconomic outlook and the emerging risks, the MPC considered today’s decision as necessary to ensure price stability.”
In a Reuters poll this week, all 15 analysts said they expected the SBP to ease, with nine forecasting a 50 basis-point cut, four predicting a deeper 100 basis-point reduction and two projecting a smaller 25 basis-point cut.
“You have to be cautious,” State Bank Governor Jameel Ahmad, told a news conference in Karachi, after announcing the policy rate, saying it is better to wait than to take action and then have to reverse it.
Pakistan is pushing through a series of economic reforms under a $7 billion International Monetary Fund Program, including a contractionary government budget passed in June that slashes spending to curb its fiscal deficit.
In its Economic Outlook Update on Tuesday, the IMF cut its growth forecast for Pakistan for the fiscal year ending June 2026 to 3.6%, well below the government’s 4.2% target.
STABILISING INFLATION
The Committee assessed that the real policy rate should be adequately positive to stabilise inflation in the target range of 5%–7%, the statement said.
Headline inflation slowed to 3.2% in June and is projected at 3.5%–4.5% in July, within the SBP’s 5.5%–7.5% target range for the fiscal year ending June 2026.
The State Bank took a cautious stance given the fragile situation of the currency and the balance of payments, said Adnan Sheikh of Pakistan Kuwait Investment Company, a Pakistani development financial institution.
“It opted to wait and see the impact of recent monetary easing, and the crop situation given the flooding,” he said, referring to heavy monsoon rains across the country this month.
The SBP held rates in June after a 100 basis-point cut in May. Since June 2024, it has lowered its policy rate by 1,100 basis points from a record 22% as price pressures receded.
The government says the economy has stabilised, but analysts warn growth remains fragile and global commodity price swings could still add pressure on prices and external balances.
GDP is projected to grow between 3.25% and 4.25% this year, the governor said.
“We have to grow at a pace which we can maintain,” he said.
Copyright Business Recorder, 2025
