ISLAMABAD, Oct 27 (Wealth Pakistan) – The State Bank of Pakistan’s Monetary Policy Committee (MPC) decided on Monday to keep the policy rate unchanged at 11 percent, stating that the current stance is appropriate to maintain price stability while supporting Pakistan’s economic recovery.
Inflation and growth trends
In its latest monetary policy statement, the MPC said headline inflation increased to 5.6 percent in September 2025 from 3 percent in August, mainly due to flood-related food supply disruptions and higher energy prices. Core inflation remained steady at 7.3 percent, suggesting that underlying demand pressures were contained.
The Committee noted that the overall macroeconomic outlook had improved since its previous meeting, as the economic impact of recent floods was smaller than initially expected. Crop losses were limited, supply chains stayed functional, and industrial and services sectors continued to show momentum.
According to the MPC, the Pakistan Bureau of Statistics (PBS) revised real GDP growth for FY2025 upward to 3 percent from 2.7 percent. Major Kharif-crop estimates were close to last year’s levels, supported by favorable weather and stable input conditions.
Risks and policy rationale
Despite positive developments, the MPC identified several risks that require caution, including volatile global commodity prices, uncertain export prospects, and potential food-supply disruptions.
Given these conditions, the MPC said maintaining the policy rate at 11 percent would allow previous monetary easing to continue filtering through the economy while keeping real interest rates positive within the 5–7 percent medium-term inflation target. “The decision strikes a balance between supporting growth and keeping inflation expectations anchored,” the statement noted.
Key economic developments
The MPC highlighted several encouraging developments since its last review. These included the IMF staff-level agreement on the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF), continued buildup in foreign-exchange reserves despite a 500 million dollar Eurobond repayment, and easing inflation expectations among consumers and businesses based on SBP-IBA sentiment surveys.
The Committee emphasized that a sustainable recovery depends on coordinated fiscal and monetary policies to absorb shocks without triggering inflation or external pressure.
Real-sector and external indicators
On the real-sector side, large-scale manufacturing expanded 4.4 percent during July–August FY2026 compared with a contraction a year earlier. Strong growth in automobiles, cement, fertilizer, and petroleum products, coupled with rising private-sector credit and improved confidence, signaled a broad industrial rebound.
The MPC projected GDP growth for FY2026 in the upper half of the earlier 3.25–4.25 percent range.
External-sector indicators remained stable. The current account recorded a surplus of 110 million dollars in September 2025, containing the Q1 FY2026 deficit to 594 million dollars. While imports rose alongside stronger economic activity, exports and remittances stayed resilient, keeping the external gap manageable.
Foreign-exchange reserves increased to 14.5 billion dollars by October 17 and were projected to rise to 15.5 billion dollars by December and 17.8 billion dollars by June 2026.
Inflation outlook and policy coordination
The MPC said the recent inflation upturn was milder than in earlier flood periods, as wheat, sugar, and perishable prices rose more slowly. Inflation is expected to stay slightly above the upper target band for a few months before easing toward target in FY2027. The outlook depends on global commodity trends, domestic energy pricing, and food-supply dynamics.
The Committee reaffirmed that fiscal discipline, effective management of external inflows, and continued structural reforms are essential to sustain disinflation and balanced growth. It concluded that the current real policy rate remains sufficiently positive to keep inflation stable within the target range over the medium term.