SBP keeps policy rate unchanged at 11.5% owing to inflation outlook, evolving geo political risks

KARACHI, Jul 27 (APP):The State Bank of Pakistan (SBP), Monday, kept the policy rate unchanged at 11.5 percent on the back of some improvements in economic indicators as well as evolving risks due to resurgence of conflict in the Middle East.

The Governor SBP Jameel Ahmad, addressing a press conference here along with deputy governors of the central bank, announced that the Monetary Policy Committee (MPC) reviewed in detail the current economic situation, various indicators and important developments taking place and unanimously decided to keep the policy rate unchanged at 11.5%.

The Committee, according to the Monetary Policy Statement issued by SBP, assessed that the macroeconomic outlook has improved from its previous meeting, though it remained susceptible to heightened risks, particularly following the resurgence of conflict in the Middle East.

The committee noted a decline in global oil prices and a relative ease in supply chain disruptions after earlier de-escalation which resulted in some improvement in recent economic indicators while headline and core inflation moderated in June, though both remained at elevated levels.

The MPC also observed some pickup in economic activity as reflected by the incoming high frequency indicators while external account pressures remained moderate. “The current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7 percent over the medium term,” the committee assessed while taking into account the recent developments and evolving risks.

The Committee, reviewing the key developments since its last meeting, noted that SBP’s foreign exchange reserves surpassed the end-June 2026 target of $18 billion, largely due to continued FX purchases amidst a small current account deficit in FY26, and realization of planned official inflows.

The MPC also noted upward revision of Pakistan’s sovereign credit rating to “B” by Standard & Poor’s, eased consumers and businesses inflation expectations and mixed signals from the confidence indicators, achievement of revised tax revenue target for FY26 by FBR and improved global inflation forecast by the IMF for both CY26 and CY27 in the latest World Economic Outlook amidst an increase in global commodity prices.

The committee noted the role of proactive macroeconomic management with a prudent monetary policy stance and sustained fiscal consolidation in effective management of the ongoing supply shock and preserving macroeconomic stability despite a challenging global environment.

The MPC reiterated its commitment to achieve price stability and continue to monitor incoming data and evolving developments and emphasized the importance of further strengthening external and fiscal buffers, and accelerating structural reforms, terming them as necessary to strengthen resilience to recurring shocks, enhance productivity and support higher and sustainable economic growth.

The MPC observed a slowdown in economic activity in Q4-FY26 in the wake of the Middle East conflict. However, high frequency indicators, including satellite imagery, automobile sales, cement dispatches, fertilizer offtake and business sentiments, suggested some recovery in economic activity in June.

Counting on some improvement in agriculture outlook and positive spill overs of better prospects for the commodity-producing sectors for the services sector as well as potential support to economic activity from the budgetary incentives, continuation of import tariff rationalization and pickup in private sector credit, the MPC expected that real GDP growth during FY27 to be in the range of 3.5 – 4.5 percent.

However, the risks emanating from volatile global commodity prices amidst re-escalation of tension in the Middle East and uncertain weather conditions, including from the evolving El Niño effects, may weigh on the growth prospects, it cautioned.

In the External Sector, the current account curtailed to a deficit of $139 million in FY26 as the record workers’ remittances partly offset the widening trade deficit and the financial account recorded a surplus.

The SBP governor said that those developments helped SBP strengthen its FX reserves and significantly reduce forward liabilities while substantial debt repayments were made in recent weeks.

He said that the current account deficit was assessed to remain in the range of 0 to 1 percent of GDP in FY27, workers’ remittances are likely to grow and may reach $44 billion, and with the realization of planned official inflows and some likely improvement in private flows, SBP’s FX reserves were targeted to increase to $20.20 billion by end-December 2026.

The governor said that the primary balance is estimated to have remained in surplus for the third consecutive year while the overall fiscal deficit was estimated to have turned out significantly lower than the previous year.

The MPC also expected that fiscal consolidation will continue in FY27, with the primary surplus targeted at 2% of GDP, whereas the overall fiscal deficit is targeted at 3.6% of GDP, stressing on sustained progress in revenue mobilization and expenditure discipline to achieve the targets. The MPC also emphasized the need of fiscal reforms, particularly tax base-broadening efforts and curtailing PSE losses, to support high and sustainable economic growth.

The committee observed that broad money (M2) growth moderated to 13.2% as of July 10, reflecting lower contributions from both the NDA and NFA of the banking system. Within the NDA, growth in net budgetary borrowing slowed, while private sector credit growth accelerated to 14.9%, it noted, adding that the increase in credit was broad based across working capital, fixed investment and consumer financing while the major borrowing sectors included textiles, telecommunications, and wholesale and retail trade.

The MPC stated that headline inflation eased to 11.1% in June 2026 from 11.7% in the previous month primarily due to decline in global energy prices and favorable electricity tariff adjustment, while core inflation moderated to 8.4%.

The Committee noted the upward trends in food inflation in June due to increase in prices of wheat and allied products as well as key perishable items and assessed that the recent rise in global commodity prices, higher input costs and domestic food price pressures, were likely to keep inflation above the target range over the next few months.

The MPC projected that inflation will subsequently ease gradually and stabilize near the upper bound of the 5-7% target range by June 2027.