RIZWAN BHATTI
KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday decided to keep the policy rate unchanged at 11.5 percent, noting that recent domestic macroeconomic developments remained broadly in line with its expectations.
Although risks to the inflation outlook have increased significantly, the MPC believes the FY27 inflation outlook remains broadly unchanged from its previous assessment, with inflation expected to gradually ease towards the upper end of the 5 to 7 percent target range by June 2027. “The key risks include 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,” the SBP said.
The MPC’s scheduled meeting held on Monday at the SBP head office in Karachi, chaired by SBP Governor Jameel Ahmad. Seven of the 10 MPC members voted to maintain the status quo. The Committee has maintained the status quo for the third consecutive meeting. The last rate change was recorded in April, when the policy rate was raised by 100 basis points from 10.5 percent to 11.5 percent.
During the meeting, the MPC noted that more frequent geopolitical and weather-related shocks continue to pose risks to the macroeconomic outlook, underscoring the need for a prudent monetary and fiscal policy mix, stronger buffers to absorb supply shocks, and timely structural reforms to enhance resilience, boost productivity and support sustainable growth.
The Committee noted that the intensifying Middle East conflict has pushed global commodity prices higher and prolonged supply chain disruptions, while recent domestic macroeconomic data remained broadly in line with its expectations.
Headline inflation increased to 11.1 percent year on year (y/y) in August from 9.2 percent in July, while core inflation was slightly lower than expectations. External account pressures remained contained, supported by robust workers’ remittances and higher financial inflows.
Meanwhile, economic activity, after witnessing a slowdown in Q4-FY26, started to pick up gradually, as reflected by recent high-frequency indicators. In this context, the MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7 percent over the medium term.
However, uncertainty regarding the outlook has increased, particularly from the worsening geopolitical environment.
The Committee noted several key developments including Moody’s upgraded Pakistan’s sovereign rating to B3 with a stable outlook; Pakistan raised USD 3 billion through Eurobonds, helping lift SBP reserves above USD 21 billion; inflation expectations rose while business and consumer confidence weakened; large-scale manufacturing fell 3.5 percent in June, though FY26 growth reached 5 percent; and fiscal consolidation exceeded the budget target. FBR tax collection remained on track in July-August FY27, while SBP transferred Rs1.9 trillion in profit to the government against Rs1.4 trillion budgeted. Lastly, central banks have become more cautious amidst challenging global economic conditions.
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.
The Committee also noted that shocks such as adverse geopolitical events and weather-related disruptions have become more frequent and continue to pose risks to the macroeconomic outlook.
Against this backdrop, the MPC emphasised the need to maintain prudent monetary and fiscal policy mix and further buildup of buffers to absorb supply shocks. This, along with timely implementation of structural reforms, is essential to enhance resilience, raise productivity, and support higher and sustainable growth.
According to Monetary Policy Statement, economic activity, which moderated in Q4-FY26 amid conflict-related disruptions, showed signs of recovery in July, supported by higher POL sales, private credit, textile exports and improved business sentiment. Increased rice and sugarcane acreage along with encouraging initial reports on cotton arrivals also improved agriculture prospects for this fiscal year. In this backdrop, the MPC expects FY27 real GDP growth to remain within the projected 3.5 to 4.5 percent range.
During FY2, fiscal consolidation was higher than budget target, supported by contained current spending and lower interest payments. FBR tax collection remained on target in July-August FY27, while higher-than-budgeted SBP profit of Rs1.9 trillion improved the fiscal outlook. The MPC stressed the need to sustain tax efforts and accelerate fiscal reforms, particularly broadening the tax base and curtailing PSE losses, amid an uncertain environment.
Broad money growth slowed to 11.6 percent year-on-year as of August 28 from 13.2 percent at the last MPC meeting, reflecting lower contributions from both NDA and NFA.
Meanwhile, private sector credit (PSC) grew 13.4 percent, supported by lower government borrowing and recovering economic activity. Credit growth was broad-based across working capital, fixed investment and consumer financing, with wholesale and retail trade, agriculture and sugar among the major borrowing sectors. As per committee expectations, PSC growth is likely to strengthen further alongside the ongoing pickup in economic activity.
According to SBP, headline inflation turned out at 9.2 percent y/y in July and 11.1 percent in August. Recent inflation outturns are driven largely by 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 percent.
Inflation expectations of consumers and businesses also increased in the latest surveys. However, the MPC noted that the recent change in the HSD pricing mechanism led to a sharp reduction in its prices in August and has partially offset the impact of higher global prices on domestic inflation.
Meanwhile, real positive interest rate on forward-looking basis is likely to keep demand-side pressures in check and contain the second-round impacts emanating from food and energy inflation.
