By Moaaz Manzoor

The State Bank of Pakistan maintained the policy rate at 11.5% on Monday, opting for caution as renewed geopolitical tensions and rising global commodity prices overshadowed improving inflation, reserves and economic activity.

The Monetary Policy Committee unanimously decided to keep the rate unchanged, assessing that the existing monetary stance remained appropriate for steering inflation towards the medium-term target range of 5-7%. While acknowledging an improvement in the macroeconomic outlook since its previous meeting, the committee said risks from external shocks and domestic price pressures remained significant.

Headline inflation eased to 11.1% year-on-year in June from 11.7% in May, largely due to the transmission of lower global energy prices to domestic consumers and a favourable electricity tariff adjustment. Core inflation also moderated to 8.4%, but remained above levels consistent with sustained monetary easing.

The decline in overall inflation was partly offset by higher food prices, particularly those of wheat and related products and key perishable items. The central bank cautioned that the recent rise in global commodity prices, higher production costs and persistent food-price pressures could keep inflation above the target range over the coming months.

The SBP expects inflation to moderate gradually and settle near the upper end of the 5-7% target range by June 2027. However, the projection remains vulnerable to fluctuations in international energy prices, changes in administered tariffs, adverse weather conditions and possible fiscal slippages.

Alongside easing inflation, the external account has provided some support to the economic outlook. The SBP’s foreign exchange reserves crossed the end-June target of $18 billion following foreign-currency purchases and planned official inflows. After substantial debt repayments, reserves stood at around $17.3 billion as of July 17.

The current account posted a relatively contained deficit of $139 million during FY2025-26, as record workers’ remittances partly compensated for a wider trade gap. The central bank expects the deficit to remain within 0-1% of GDP during FY2026-27 and has set a foreign exchange reserves target of $20.20 billion by the end of December.

The committee also took note of Standard & Poor’s upgrade of Pakistan’s sovereign credit rating to “B”, which added to signs of improving external and investor confidence.

Domestic economic activity and business sentiment showed improvement in June with private-sector credit growth accelerating to 14.9% by July 10.

Against this backdrop, the central bank projected GDP growth in the range of 3.5-4.5% for FY2026-27. It cautioned, however, that uncertainty surrounding global commodity markets and weather conditions could affect the pace of recovery.

Speaking to Wealth Pakistan, Syed Zafar Abbas, General Manager at Zahid Latif Khan Securities Pvt Ltd, said expectations of a modest rate cut had strengthened after the reduction in National Savings rates, but the escalation of the Iran-US conflict had narrowed the central bank’s room for manoeuvre.

“Otherwise, a cut of around 20 to 50 basis points could have been considered,” he said, adding that uncertainty over the conflict’s impact on energy and inflation had compelled the SBP to adopt a wait-and-see approach.

Abbas said the direction of monetary policy would now depend largely on whether geopolitical tensions continued to ease and whether lower energy and commodity costs translated into a sustained decline in inflation.

“If the war eases, inflation can be brought under control, and the State Bank may then be in a position to cut the rate at some stage,” he said.

Ali Najib, Deputy Head of Trading at Arif Habib Limited, said the committee had weighed improvements in reserves, economic activity and the sovereign credit rating against inflationary and geopolitical risks.

He said investor sentiment strengthened after the suspension of military strikes between the United States and Iran raised hopes of a diplomatic resolution and the resumption of shipping through the Strait of Hormuz.

The improvement in risk appetite helped the KSE-100 Index gain 7,241 points, or 4.23%, to close at 178,262 on Monday, he added.

The decision leaves borrowing costs unchanged for businesses and consumers, delaying immediate relief for investment and consumption. However, the moderation in inflation, stronger foreign exchange reserves and faster private-sector credit growth indicate that the monetary-easing cycle may not have ended.

Any reduction in the policy rate is now likely to depend on whether geopolitical tensions subside without triggering another surge in energy prices and whether domestic inflation continues moving towards the SBP’s target range.

Credit: INP-WealthPk