Qudsia Bano

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) on Monday decided to keep the policy rate unchanged at 11 percent, citing evolving macroeconomic conditions and heightened uncertainty following widespread floods.

The MPC noted that inflation remained moderate in July and August, with core inflation continuing its gradual decline. Economic activity has gained momentum in recent months, supported by growth in large-scale manufacturing (LSM) and other high-frequency indicators. However, the floods have temporarily clouded the near-term outlook, particularly for the agriculture sector, which is expected to push up food prices and widen the current account deficit.

Despite these challenges, the SBP highlighted that Pakistan’s economy is on a stronger footing compared to previous major flood events. The buildup of external and fiscal buffers in recent years, combined with lower global commodity prices and contained domestic demand, is expected to keep inflationary and external account pressures in check.

On the real sector front, LSM grew by 3 percent year-on-year in the final quarter of FY25, reversing earlier contractions. Yet, losses in Kharif crops and supply chain disruptions are likely to slow overall GDP growth in FY26, which the central bank now projects at the lower end of its earlier range of 3.25–4.25 percent.

In the external sector, the current account posted a $254 million deficit in July. Nonetheless, SBP reserves remained stable at $14.3 billion as of September 5. The central bank expects reserves to rise to around $15.5 billion by December with planned inflows, though flood-related crop damage could add pressure on trade.

Fiscal accounts showed a 14.1 percent year-on-year rise in Federal Board of Revenue (FBR) tax collections in July-August, alongside a sizeable Rs2.4 trillion profit transfer from SBP to the government. These developments are expected to generate a significant primary surplus in the first quarter of FY26. However, the central bank warned that flood-related relief spending could add strain to expenditures.

Private sector credit grew 14.1 percent year-on-year, with lending activity broad-based across sectors, including textiles, telecom, and trade. Meanwhile, broad money growth eased to 13.9 percent by late August. Inflation eased to 3 percent in August after rising to 4.1 percent in July, but food price pressures have already emerged due to the floods. The SBP expects inflation to exceed the 5–7 percent target range in the second half of FY26 before easing back in FY27.

The MPC concluded that keeping the policy rate steady at 11 percent strikes a balance between supporting growth and maintaining price stability amid ongoing uncertainty.

Credit: INP-WealthPk