SBP keeps policy rate unchanged at 11.5% amid improved outlook, Middle East risks

KARACHI: The State Bank of Pakistan (SBP) on Monday left its key policy rate unchanged at 11.5%, saying the country's macroeconomic outlook had improved since its previous review, although heightened risks—particularly the renewed conflict in the Middle East—continued to warrant a cautious monetary policy stance.

The Monetary Policy Committee (MPC), which unanimously decided to maintain the benchmark rate, said recent moderation in headline and core inflation, improving economic indicators and manageable external account pressures supported the decision. It added that the current policy stance remained appropriate to steer inflation towards the 5-7% target range over the medium term.

The committee noted that the earlier de-escalation of tensions in the Middle East had lowered global oil prices and eased supply chain disruptions, contributing to an improvement in economic indicators. However, it cautioned that renewed geopolitical tensions continued to pose significant risks.

The SBP said its foreign exchange reserves exceeded the end-June FY26 target of $18 billion, driven by continued foreign exchange purchases, a small current account deficit during FY26 and planned official inflows. It also highlighted Pakistan's sovereign credit rating upgrade to 'B' by Standard & Poor's, easing inflation expectations among consumers and businesses, the Federal Board of Revenue's achievement of its revised FY26 tax collection target, and the IMF's upward revision of global inflation forecasts for 2026 and 2027 amid rising commodity prices.

The central bank said prudent monetary policy and continued fiscal consolidation had helped absorb supply-side shocks and preserve macroeconomic stability despite a challenging global environment. It reiterated its commitment to price stability and stressed the need to strengthen external and fiscal buffers while accelerating structural reforms.

On the growth outlook, the MPC acknowledged that economic activity slowed in the final quarter of FY26 due to the Middle East conflict, higher global energy prices and domestic austerity measures. However, high-frequency indicators—including automobile sales, cement dispatches, fertiliser offtake, satellite imagery and business sentiment—suggested a recovery in June.

The committee also noted an improved agricultural outlook, with higher expected sugarcane production likely to offset weaker cotton output. Combined with budgetary incentives, import tariff rationalisation and stronger private-sector credit, these factors are expected to support real GDP growth of 3.5-4.5% in FY27, although volatile commodity prices and weather-related risks, including evolving El Niño conditions, remain key concerns.

On the external front, Pakistan recorded a current account deficit of $139 million in FY26, near the lower end of the projected range. Record workers' remittances partly offset a wider trade deficit, while a financial account surplus enabled the SBP to strengthen reserves and reduce forward liabilities.

After recent external debt repayments, the SBP's reserves stood at around $17.3 billion as of July 17. The central bank expects the current account deficit to remain within 0-1% of GDP in FY27 and has set a target of increasing reserves to $20.2 billion by the end of December 2026, supported by official inflows and stronger private-sector financing.

The MPC also noted that the FBR met its revised Rs13 trillion tax collection target in FY26, while the primary fiscal balance remained in surplus for a third consecutive year. Fiscal consolidation is expected to continue in FY27, with a targeted primary surplus of 2% of GDP and an overall fiscal deficit of 3.6% of GDP.

Meanwhile, broad money growth slowed to 13.2% year-on-year as of July 10 from 15.2% at the previous policy review, while private-sector credit accelerated to 14.9%, reflecting easier financial conditions and increased borrowing by the textile, telecommunications, and wholesale and retail sectors.

Headline inflation eased to 11.1% in June from 11.7% in May, mainly due to lower global energy prices and favourable electricity tariff adjustments. Core inflation also moderated to 8.4%, although food inflation rose because of higher wheat and perishable food prices.

Looking ahead, the SBP expects inflation to remain above the target range in the coming months due to higher global commodity prices, rising input costs and domestic food price pressures. It projects inflation to gradually decline and stabilise near the upper end of the 5-7% target range by June 2027, while warning that energy price volatility, administered price adjustments, adverse weather conditions and fiscal slippages could affect the outlook.