By Moaaz Manzoor
As the next monetary-policy meeting of the State Bank of Pakistan (SBP) approaches on 27 October, a quietly cautious tone is likely to prevail. Recent data show inflation ticking higher and the trade imbalance widening — yet the early signs of a domestic recovery insist that policy stability remain the order of the day.
Markets overwhelmingly expect the SBP to hold the policy rate at 11 %. Analysts at Arif Habib Limited (AHL) interpret this as the central bank’s attempt to thread a needle: on one hand, emerging inflation pressures and a marginally wider current-account deficit; on the other, a nascent recovery that must not be derailed.
Inflation rose to 5.6 % in September 2025 from 3.0 % in August — a sharp jump largely attributable to flood-related supply disruptions in food. The average inflation forecast for FY26 has nudged above 7 %, placing it just outside the SBP’s 5-7 % target band.
Core inflation, however, held steady at 7.3 %, suggesting underlying price pressures remain contained and giving the central bank breathing room to maintain its cautious approach.
On the external front, the rupee has appreciated 0.9 % so far this fiscal year, helped by improved credit ratings, stronger foreign inflows and progress under the IMF programme. But trouble is brewing.
According to the Pakistan Bureau of Statistics, the trade deficit widened to USD 3.4 billion in September. Exports stood at USD 2.5 billion — down 11.9 % year-on-year, though up 3.4 % from August — while imports surged 15.2 % year-on-year and 11.6 % m/m to USD 5.9 billion. During Q1 FY26 the trade deficit jumped 33.8 % y/y to USD 9.4 billion. Remittances of USD 3.2 billion in September (up 1 % y/y) provided a cushion; AHL estimates the full-year current-account deficit will remain manageable within the SBP’s projected range of 0 to -1 % of GDP, suggesting external pressures are present — but not yet overwhelming.
Domestically, signs of revival are visible. Large-scale manufacturing grew 9 % y/y in July, driven by gains in textiles, food and petroleum. Bond yields have also held broadly steady— reinforcing market confidence that the SBP will stay the course.
In AHL’s pre-policy survey, 87.5 % of respondents (banks, asset managers, corporates) expect the rate to remain unchanged; just 12.5 % foresee a modest 50-bps cut. Syed Zafar Abbas of Zahid Latif Khan Securities told Wealth Pakistan the central bank is unlikely to consider a cut at this point.
He argued that while the IMF staff-level agreement is positive, it may not immediately shape policy because the post-flood recovery remains slow and inflation risks are still present. “Economic indicators have yet to show major improvement, and with inflation risks still present,” he said, “the State Bank may prefer to maintain the current stance this quarter.”
In short: the SBP finds itself between a rock and a soft place. The recovery needs steady support; the external and inflation risks need monitoring. Given that balance, a “steady-as-she-goes” policy is not merely likely — it is prudent.