SBP maintains policy rate at 11.5% to keep inflation within target range

KARACHI, Jun 15 (APP): State Bank of Pakistan (SBP), Monday, maintained the policy rate at 11.5%, considering the current cautious monetary policy stance as appropriate to rein in the inflationary pressures.

The Monetary Policy Committee (MPC) decided to keep the policy rate unchanged, noting that the impact of the Middle East conflict started reflecting in recent economic indicators while global oil prices, despite some ease following the recent positive geopolitical developments, were still elevated as compared to pre-conflict levels.

The Committee, according to a statement issued here, noted that Headline inflation rose to double digits in April and May and core inflation also edged up while some signs of moderation were observed in economic activity, reflecting the impact of elevated prices, austerity measures and prevalent economic uncertainty.

Though the external account pressures remain moderate and macroeconomic outlook broadly unchanged, the MPC assessed that the current monetary policy stance was appropriate to guide inflation towards the target range of 5 to 7% over the medium term.

The Middle East conflict has begun to impact macroeconomic conditions in many economies, and a rising number of central banks have started to raise their policy rates, the Committee noted while reviewing key developments since its last meeting, including estimation of real GDP growth for FY26 at 3.7% and a primary balance surplus at 2.5% of GDP, recovery of both consumers and businesses confidence and increase in SBP’s FX reserves to $17.2 billion.

The MPC noted that proactive macroeconomic management- underpinned by forward looking monetary policy and consistent fiscal consolidation- has helped sustain ongoing macroeconomic stability despite the prolonged Middle East conflict.

The committee also stressed on accelerating structural reforms to strengthen the economy’s resilience to supply shocks, enhance productivity, and create the necessary conditions for higher and more sustainable economic growth.

Reviewing the real sector data, the MPC observed that the growth in FY26 was driven by the services, industry and agriculture. Large-scale manufacturing posted a strong growth of 6.5% during July-March FY26, though it is expected to moderate in Q4-FY26, as spillover from the conflict may continue to moderate activity in both industry and services sectors in the coming months while challenging weather conditions may affect agriculture prospects.

In the External Sector, the current account turned into a deficit of $0.3 billion in April, leading to a cumulative deficit of $0.2 billion during July-April FY26 due to a widening of the trade deficit amidst the surge in energy imports in April, which more than offset the resilient workers’ remittances.

“The realization of sizable workers’ remittances during May is likely to contain the current account deficit in FY26 to the lower end of the earlier projected range,” the MPC assessed, adding that increase in official inflows provided critical support in meeting external obligations.

These developments have facilitated ongoing FX purchases and buildup in SBP’s FX reserves, which are projected to reach $18 billion by end-June 2026, the MPC noted, expecting that the reserve buildup will continue amidst FX purchases and timely realization of planned official inflows.

The committee further noted that the fiscal consolidation efforts remained broadly on track, primarily driven by expenditure restraint while the revenue growth moderated as reflected by revision of the FBR tax collection target to around Rs13 trillion for FY26.

Despite downward revision, the government is confident to achieve a primary balance surplus of 2.5% of GDP in FY26 by containing expenditures while for FY27, the government is targeting a primary balance surplus of 2.0 percent of GDP. In this regard, the MPC emphasized the importance of continuing with fiscal consolidation and reiterated the need for timely implementation of structural reforms, particularly measures aimed at broadening the tax base and reforming PSEs.

The MPC noted that headline inflation rose from 7.3% in March to 10.9% in April and 11.7% in May due to the low base effect and hike in domestic energy prices while subsequent rise in transportation and production costs had contributed to an increase in core inflation to 8.2% in April and 8.7% in May. Surge in wheat and its product prices pushed up food inflation during the last two months, it added.

The MPC assessed that inflation may remain in double digits for the next few months, before gradually easing subsequently but geopolitical developments, the extent of pass-through of global prices to domestic fuel prices, magnitude of adjustments in power and gas tariffs, potential fiscal slippages, and uncertain food prices amidst weather-related challenges may affect the outlook.