The State Bank of Pakistan (SBP) on Monday maintained the policy rate at 11.5%, in line with market expectations of the central bank assessing the impact of the Middle East conflict before altering its monetary policy stance.
Announcing the decision, SBP Governor Jameel Ahmed noted the Monetary Policy Committee’s decision was motivated by several factors. “Every time we hold committee meetings in January and July, we also issue projections for the next six months and what would be the level of economic growth, inflation outlook and situation of the external account; I will share that assessment as well,” he said.
Recalling that inflation had declined in the first half of the previous year, he said the fallout of the Middle East crisis had pushed it back up. “From July to February, our average inflation was 5.5%,” he said, noting this was within the government’s target range of 5-7%.
Once the conflict erupted, he said, inflation had climbed to 11.7% in May, while it stood at 11.1% in June. “We are hoping that if there is no further escalation, then after one to two months, we will see a decline in inflation,” he said. “We believe that towards the end of June next year, it will be within the upper band of our target range, either a little over seven or close to seven,” he claimed, warning risks remained due to the direct impact of the geopolitical situation.
“Overall, inflation from this level will see an improvement,” he maintained, referring to current inflation levels.
According to surveys conducted by brokerage houses prior to the MPC meeting, over 90% of respondents expected the policy rate to remain unchanged while the rest had estimated a 50 basis points increase.
The central bank cut its policy rate by 50 basis points to 10.5% in December 2025 before raising it by 100 basis points to 11.5% in April this year, citing the fallout of the Middle East conflict. It has since kept the rate unchanged despite ongoing demands from the business community for substantial reductions to bolster economic activity.
Growth outlook revised
The SBP projected Pakistan’s economy to grow between 3.5% and 4.5% in fiscal year 2026-27, citing improving agricultural prospects, stronger private-sector credit, tariff rationalization and budgetary incentives.
Acknowledging that economic activity slowed during the final quarter of FY26 due to the Middle East conflict, rising global energy prices and government austerity measures, the MPC said June’s data indicated a recovery, supported by stronger automobile sales, cement dispatches, fertilizer offtake, business sentiment and satellite imagery tracking economic activity.
The central bank said higher expected sugarcane production is likely to offset weaker cotton output, while improved performance in commodity-producing sectors should benefit the services sector. However, it cautioned that volatile global commodity prices, geopolitical tensions and uncertain weather conditions, including evolving El Niño effects, remain key downside risks to growth.
Inflation to remain above target
Headline inflation slowed to 11.1% year-on-year in June from 11.7% in May, mainly due to lower global energy prices and favorable electricity tariff adjustments. Core inflation also eased to 8.4%, although it remained elevated.
The central bank noted that food inflation accelerated in June because of higher wheat and perishable food prices.
Looking ahead, the SBP expects inflation to remain above its target range over the coming months due to higher global commodity prices, rising input costs and domestic food price pressures before gradually easing to around the upper end of the 5-7% target range by June 2027.
The inflation outlook remains vulnerable to fluctuations in global oil prices, changes in administered energy prices, adverse weather conditions and potential fiscal slippages.
External position
The MPC highlighted improvements in Pakistan’s external position, noting that SBP foreign exchange reserves exceeded the end-June target of $18 billion, supported by continued foreign exchange purchases, a small current account deficit during FY26 and planned official inflows. However, after sizeable external debt repayments in recent weeks, reserves stood at around $17.3 billion as of July 17.
The current account recorded a deficit of $139 million during FY26, near the lower end of the central bank’s projected range, as record workers’ remittances largely offset a wider trade deficit caused by the Middle East conflict.
For FY27, the SBP expects the current account deficit to remain contained within 0-1% of GDP despite stronger economic activity. It also targets foreign exchange reserves of $20.2 billion by the end of December 2026, supported by planned official inflows and improved private capital inflows.
Fiscal consolidation
The SBP said the Federal Board of Revenue (FBR) achieved its revised FY26 tax collection target of Rs. 13 trillion, while Pakistan is estimated to have recorded a primary fiscal surplus for the third consecutive year. The overall fiscal deficit also narrowed significantly compared with the previous year.
For FY27, the government aims to maintain a primary surplus of 2% of GDP and limit the overall fiscal deficit to 3.6% of GDP. The MPC stressed that achieving these targets would require continued tax reforms, broadening the tax base, tighter expenditure management and reducing losses of state-owned enterprises.
The SBP reported that broad money growth slowed to 13.2% year-on-year as of July 10 from 15.2% at the previous policy meeting. Meanwhile, private-sector credit expanded by 14.9%, reflecting easing financial conditions and stronger borrowing for working capital, fixed investment and consumer financing.
The main borrowing sectors included textiles, telecommunications and wholesale and retail trade.
The MPC also noted that Pakistan’s sovereign credit rating was upgraded to ‘B’ by Standard & Poor’s since the previous meeting. It added that inflation expectations declined among both consumers and businesses, while confidence indicators presented a mixed picture.
The committee reiterated that prudent monetary policy and sustained fiscal consolidation have helped preserve macroeconomic stability despite global uncertainties and reaffirmed its commitment to maintaining price stability while strengthening external and fiscal buffers through continued structural reforms.