SBP expected to maintain status quo on policy rate due to concerns over spiraling inflation: report

The State Bank of Pakistan (SBP) is expected to maintain status quo and adopt a cautious approach in the upcoming Monetary Policy Committee (MPC) meeting due to concerns over spiraling of inflation out of SBP target range in the medium term, implications of US tariffs and double digit growth in majority of the leading economic indicators, brokerage firm AKD Research forecasted in its latest report.

The emerging situation demands a balanced approach between efforts to gain lost economic growth and contain inflationary pressures due to disruption in the food supply chain while managing the country’s import bills, the research firm said.

Despite recent spikes in food prices, AKD Research expects inflation to remain at the lower end of the SBP’s target range of 5–7%. The firm attributes this stability to a strong currency, lower global commodity prices, and stable exchange rates. “We expect inflation to remain at the lower end of SBP’s targeted range of 5–7%, given the stable currency and lower commodity prices,” the report noted.

AKD also suggests there is room for further interest rate cuts, citing elevated real interest rates, a positive current account surplus, foreign exchange reserves that cover 2.7 months of imports, and credit rating improvements from global agencies. However, the firm revised its previous forecast for a 150-basis point (bps) rate cut, moving the expectation from December 2025 to June 2026.

Inflation is expected to ease from the peak of 5.6% year-on-year recorded in September 2025, with some residual pressure towards the end of the year. “We foresee inflation remaining at the lower end of the SBP’s medium-term target range of 5–7% in FY26, supported by moderation in the Food, Transport, and Housing indices,” the report added. 

Food prices, in particular, are expected to normalize, with the impact of the recent floods anticipated to be less severe compared to previous episodes, thanks to stricter regulation of retail market prices.

The report also highlights that a strong currency will help mitigate persistent inflationary pressures. “We expect the currency to remain strong, supported by strong workers’ remittance inflows, lower interest payments, adequate foreign exchange buffers, and renewed access to international markets following credit rating upgrades,” it stated. Structural improvements in the foreign exchange market and better governance are also expected to outweigh the effects of reduced subsidies.

AKD Research pointed to subdued oil and commodity prices as a key factor in offsetting potential declines in rice exports, which would help keep inflationary pressures under control. 

“Subdued oil and other commodity prices would help offset any potential drop in rice exports, thereby keeping persistent inflationary pressures at bay,” it said.