The State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) on Monday decided to keep the policy rate unchanged at 11.5% with a majority of seven of 10 members supporting the move.
In a statement, the central bank said the MPC had noted renewed tensions in the Middle East and ongoing supply disruptions but had weighed them against recent domestic macroeconomic data.
According to the SBP, headline inflation increased to 11.1% year-on-year in August, up from 9.2% in July, while core inflation was slightly lower than expectations. “External account pressures remained contained, supported by robust workers’ remittances and higher financial inflows,” it said, adding economic activity had also gradually picked up.
“In this context, the MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7% over the medium term. However, uncertainty regarding the outlook has increased, particularly from the worsening geopolitical environment,” it added.
On key developments since its last meeting, the MPC noted an upgrade to Pakistan’s sovereign credit rating by Moody’s, as well as the raising of $3 billion through Eurobonds. It said the bond, coupled with ongoing FX purchases, had helped increase foreign exchange reserves to over $21 billion. Additionally, the MPC noted that inflation expectations of both businesses and consumers increased in September, while their confidence weakened. Further, large-scale manufacturing output declined by 3.5% in June, bringing cumulative FY26 growth to 5%, while fiscal consolidation turned out higher than the budgetary target during FY26.
“Moreover, FBR tax collection remained on-target during July-August FY27 while SBP transferred higher profit of Rs. 1.9 trillion than budgeted amount of Rs. 1.4 trillion to the government,” it added.
“While noting these developments and evolving risks, the MPC reiterated its commitment to achieve price stability with close monitoring of incoming data and ongoing situation in the Middle East,” it said, noting that external shocks were becoming more frequent and continued to pose risks to the macroeconomic outlook.
Real Sector
The SBP said high frequency indicators such as POL sales, private sector credit, textile exports, business sentiments, and satellite imagery of both nighttime lights and gas emissions suggested recovery in economic activity in July. “Furthermore, increased acreage for rice and sugarcane, along with encouraging initial reports on cotton arrivals, have improved prospects for the agriculture sector,” it said, adding the MPC expects real GDP growth to remain within the earlier projected range of 3.5-4.5% in FY27.
External Sector
The MPC said July’s current account deficit was largely in line with expectations, with growth in imports of goods and services outpacing the increase in exports and robust workers’ remittances. It said the issuance of Eurobonds in September, coupled with FX purchases by the SBP, had helped raised FX reserves to $21.4 billion. “Going forward, resilient workers’ remittances and higher ICT exports are expected to contain the current account deficit within 0-1% of GDP in FY27. It said at the current pace, FX reserves were projected to approach the 3-month import cover by end-June 2027. “This outlook, however, remains susceptible to elevated global commodity prices and supply constraints amidst the unfolding developments in the Middle East,” it warned.
Fiscal Sector
The MPC said fiscal consolidation had turned out higher than the budgetary targets in FY26 due to contained current expenditures, especially lower interest payments. It said the first two months of FY27 saw tax collection in line with the FBR’s targets, though noted growth deceleration from last year. “At the same time, the transfer of significantly higher than budgeted SBP profit of Rs. 1.9 trillion has improved the fiscal outlook for FY27,” it said, while stressing the need to achieve the tax revenue target. It stressed on the need to broaden the tax base and curtail PSEs losses to support high and sustainable economic growth.
Money and credit
The MPC said broad money growth had decelerated to 11.6% year-on-year as of Aug. 28, from 13.2% at the last MPC meeting. Private sector credit grew by 13.4% year-on-year, supported by reduced net budgetary borrowing from the banking system and recovery in economic activity. It said it expected private sector credit growth to strengthen further alongside the ongoing pickup in economic activity.
Inflation
According to the MPC, headline inflation stood at 9.2% year-on-year in July and 11.1% in August. It attributed this to food inflation in the wake of elevated prices of wheat and allied products, and perishable items. “At the same time, intensification of the conflict in the Middle East has kept energy inflation at elevated levels. Increased fuel prices translated into higher transport costs, which pushed core inflation to 8.7%,” it said.
The MPC maintained the recent change in the diesel pricing mechanism had led to a sharp reduction in its prices in August, partially offsetting the impact of higher global prices on domestic inflation. “On balance, the inflation outlook for FY27 remains broadly unchanged from the previous assessment, and inflation is expected to gradually ease towards the upper bound of 5-7% target range by June 2027; though the risks to the outlook have increased significantly,” it said. Key risks were volatility in global commodity prices, magnitude of adjustments in electricity and gas tariffs, supply disruptions, and unexpected movements in food prices amidst the worsening El Niño conditions, it added.