The State Bank of Pakistan (SBP) on Monday announced it is keeping the key policy rate unchanged at 11%, citing potential risks to the external sector amidst the widening trade deficit and weak financial inflows.
The central bank had lowered the interest rate by 100 basis points to 11% in its last meeting on May 5, mainly owing to steady disinflation. Overall, since June 2024, the central bank has cut the rate by 1,100 basis points from an all-time high of 22%.
“At its meeting today, the committee decided to keep the policy rate unchanged at 11%,” read the MPC statement, noting that the increase in inflation in May to 3.5% year-on-year was in line with its expectation, whereas core inflation declined marginally. “Going forward, inflation is expected to trend up and stabilize in the target range during FY26,” it added.
The MPC noted economic growth is gradually recovering and expected to gain further momentum in the coming fiscal year, driven by the lagged 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 said, adding some of the proposed budgetary measures in the coming fiscal year might further widen the trade deficit by increasing imports.
“In this regard, the Committee deemed today’s decision appropriate to sustain the macroeconomic and price stability,” it added.
Noting key developments over the past month, the MPC said the real GDP growth for FY25 was provisionally reported at 2.7%, with the government targeting a higher growth of 4.2% next year. “Second, despite a substantial widening in the trade deficit, the current account remained broadly balanced in April,” it said, adding the release of the latest IMF tranche had brought the central bank’s foreign exchange reserves to $11.7 billion as of June 6.
“Third, the revised budget estimates indicate the primary balance surplus at 2.2% of GDP in FY25, up from 0.9% last year. For next year, the government is targeting a higher primary surplus of 2.4% of GDP,” it said. “Lastly, global oil prices have rebounded sharply, reflecting the evolving geopolitical situation in the Middle East and some ease in U.S.-China trade tensions,” it said, estimating the real interest rate to remain adequately positive to stabilize inflation within the target range of 5-7%.
“Furthermore, the Committee 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,” it said.
Inflation
The MPC has assessed recent budgetary measures to have a limited impact on its inflation outlook. However, it warned, some near-term volatility was likely before inflation gradually inches up and stabilizes within the target range. However, this outlook 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.
Real Sector
Citing provisional estimates of the Pakistan Bureau of Statistics, the MPC noted the economy gained momentum during the second half of FY25, with real GDP growth accelerating to 3.9% from 1.4% in the first half of FY25. “This outturn was broadly in line with the MPC’s earlier expectations, though with compositional differences,” it said, noting that agriculture had underperformed relative to FY24 due to a sizable decline in the production of major crops.
However, it said, the industry and services sectors contributed to the uptick in real GDP growth, particularly in the second half of FY25. “Looking ahead, the MPC anticipates the industry and services sectors to continue to drive economic growth in FY26,” it said, while adding agriculture prospects appear subdued, as indicated by initial information of Kharif crops amidst unfavorable weather conditions. “On balance, the Committee expects real GDP growth to increase further during FY26.”
External Sector
The MPC noted 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,” it said, while citing “strong” workers’ remittances as offsetting the 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,” it said, while warning that the uncertain global trade environment, coupled with expected continued strong import demand, would likely 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,” it said.
“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,” it warned.