By Moaaz Manzoor

The State Bank of Pakistan (SBP) on Monday left its benchmark policy rate unchanged at 11.5%, signalling confidence in the country's improving macroeconomic fundamentals while maintaining a cautious stance amid lingering inflation risks.

The decision, announced after the Monetary Policy Committee's (MPC) fourth meeting of the year, was widely anticipated by financial markets. The central bank said the current monetary policy stance remains appropriate to guide inflation toward its medium-term target range of 5-7%.

In its policy statement, the MPC acknowledged that headline inflation remained elevated in April and May, while core inflation also edged up. However, it noted that recent geopolitical developments had helped ease global oil prices, although they remain above pre-conflict levels.

The committee said Pakistan's overall macroeconomic outlook remains broadly unchanged, citing several encouraging indicators. These include provisional GDP growth of 3.7% for FY2025-26, improved consumer and business confidence, stronger external-sector performance and foreign exchange reserves rising to $17.2 billion as of June 5 following successful reviews under the IMF's Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF).

The MPC also highlighted fiscal consolidation efforts, noting that the government is estimated to have achieved a primary budget surplus of 2.5% of GDP in FY2025-26 and is targeting a surplus of 2.0% in FY2026-27.

Speaking with Wealth Pakistan, Waqas Ghani, Head of Research at JS Global Capital Limited, said the central bank appeared to view the recent rise in inflation as largely supply-driven rather than demand-led.

"The recent rise in inflation is largely supply-driven, stemming from higher energy prices, wheat costs and conflict-related disruptions rather than excess demand," he said.

According to Ghani, a rate hike would have had a limited impact on addressing these inflationary pressures while potentially slowing economic activity.

He said policymakers likely concluded that the existing policy rate remains sufficiently restrictive, particularly as economic growth has moderated and fiscal tightening measures continue to restrain demand.

Syed Zafar Abbas, Manager at Zahid Latif Securities, said the decision reflected expectations that inflationary pressures may ease in the coming months.

"Given the inflation figures, there was a case for increasing the rate and many expected at least a 50-basis-point hike," he said.

However, Abbas noted that improving geopolitical conditions and the prospect of lower oil prices may have influenced the committee's decision to maintain the current stance.

"If oil prices continue to decline and inflation starts reversing, there may be no need for further tightening. The easing of tensions appears to have played a key role in this decision," he added.

Economic analyst AAH Soomro also described the move as prudent, citing strong remittance inflows, improving external-sector indicators, and a lower energy import bill.

"Remittances have remained exceptionally strong in recent months and reached a historic high in May, while the energy import bill declined during the month," he told Wealth Pakistan.

Soomro said lower international oil prices could translate into reduced domestic fuel costs and help ease inflationary pressures across the economy.

He also expressed optimism about Pakistan's external position, noting that foreign exchange reserves continue to strengthen.

"Foreign exchange reserves are increasing steadily and could reach around $18 billion next month. Overall, the key indicators are moving in the right direction, which supports the decision to keep rates unchanged for the next six to twelve weeks," he said.

Despite the positive outlook, the MPC warned that inflation could remain in double digits in the near term before gradually moderating. It identified several risks to the outlook, including global commodity prices, energy costs, utility tariff adjustments, fiscal slippages and weather-related disruptions affecting food supplies.

Analysts believe the decision reflects the central bank's balancing act between supporting economic recovery and preventing inflation expectations from becoming entrenched. With reserves strengthening, remittances remaining robust and growth stabilising, they say the SBP has gained room to wait for clearer inflation trends before considering its next policy move.

For now, economists expect the central bank to maintain a cautious approach, closely monitoring global developments and domestic price pressures before making any significant adjustments to the policy rate.

 
Credit: INP-WealthPk