The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has kept the policy rate unchanged at 11.5 percent, a decision reached by a majority of seven out of ten members at its meeting on Monday.
The Committee cited an escalation in the Middle East conflict as a key factor behind its decision, noting that the conflict has pushed already elevated global commodity prices higher and prolonged supply chain disruptions.
At the same time, domestic macroeconomic indicators broadly matched the expectations of MPC. Headline inflation rose to 11.1 percent year-on-year in August, up from 9.2 percent in July, while core inflation came in slightly below projections.
External account pressures stayed contained, aided by strong workers remittances and higher financial inflows, and economic activity, after slowing in the fourth quarter of FY26, showed signs of a gradual pickup based on recent high-frequency data.
The MPC said the current policy stance remains appropriate to steer inflation toward its medium-term target range of 5 to 7 percent, though it flagged growing uncertainty stemming from the deteriorating geopolitical situation.
Several developments since the last meeting of the Committee shaped its assessment. Moody’s upgraded Pakistan’s sovereign credit rating to B3 with a stable outlook, and the country raised $3 billion through Eurobonds in international capital markets.
Combined with continued foreign exchange purchases by the State Bank, this pushed FX reserves above $21 billion. Meanwhile, inflation expectations among both businesses and consumers rose in September even as their confidence weakened.
Large-scale manufacturing output fell 3.5 percent in June, bringing cumulative FY26 growth to 5.0 percent, and fiscal consolidation exceeded the budgetary target for the year.
The Federal Board of Revenue kept tax collection on target during July and August of FY27, while the State Bank transferred Rs1.9 trillion in profit to the government, well above the budgeted Rs1.4 trillion. The Committee also noted that central banks globally have grown more cautious amid difficult economic conditions.
The MPC reaffirmed its commitment to price stability, saying it will closely monitor incoming data and the situation in the Middle East. It warned that geopolitical shocks and weather-related disruptions have become more frequent and continue to threaten the macroeconomic outlook, and called for a prudent mix of monetary and fiscal policy, stronger buffers against supply shocks, and timely structural reforms to build resilience and support sustainable growth.
On growth, the Committee said high-frequency indicators including POL sales, private sector credit, textile exports, business sentiment, and satellite data on nighttime lights and gas emissions point to a recovery in economic activity in July.
Higher acreage for rice and sugarcane, along with encouraging early cotton arrivals, have also improved the agriculture sector’s prospects, supporting the outlook for services as well. The MPC maintained its real GDP growth projection for FY27 at 3.5 to 4.5 percent.
The current account deficit in July matched expectations, as import growth outpaced exports and remittance inflows. September’s Eurobond issuance and continued FX purchases lifted reserves to $21.4 billion.
The MPC expects resilient remittances and rising IT exports to keep the current account deficit within 0 to 1 percent of GDP in FY27, with reserves projected to approach three months of import cover by the end of June 2027, an outlook that remains vulnerable to global commodity price swings and Middle East-related supply constraints.
On fiscal matters, FY26 consolidation outperformed budget targets, driven mainly by lower interest payments. Tax collection in the first two months of FY27 met FBR targets, though growth slowed from the previous year, while the higher-than-budgeted SBP profit transfer improved the fiscal outlook.
The MPC stressed that meeting the tax revenue target will require sustained effort, particularly through broadening the tax base and reducing losses at state-owned enterprises.
Broad money growth slowed to 11.6 percent year-on-year as of August 28, down from 13.2 percent at the time of the previous MPC meeting, reflecting lower contributions from both net domestic and net foreign assets.
Private sector credit grew 13.4 percent year-on-year, driven by reduced government borrowing from banks and a pickup in economic activity, with wholesale and retail trade, agriculture, and sugar among the largest borrowing sectors.
On inflation, the Committee attributed recent increases largely to higher food prices, particularly for wheat and perishables, along with elevated energy costs tied to the Middle East conflict. Higher fuel prices raised transport costs, pushing core inflation to 8.7 percent, while consumer and business inflation expectations also rose.
However, a change in the HSD pricing mechanism led to a sharp price cut in August, partly offsetting global price pressures. The MPC expects inflation to gradually ease toward the upper end of the 5 to 7 percent target range by June 2027, though it flagged heightened risks from volatile global commodity prices, potential electricity and gas tariff adjustments, supply disruptions, and unpredictable food price movements amid worsening El Niño conditions.
