The State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 11.5 percent in today’s monetary policy meeting, according to its latest update issued on Monday.
Today marks the last MPC meeting of the outgoing fiscal year 2025-26.
This is the first unchanged stance adopted by the central bank after the April 2026 session.
The Committee noted that global oil prices have eased following recent positive geopolitical developments; however, they remain elevated compared to pre-war levels. Nonetheless, as anticipated in the last MPC meeting, the impact of the war is now reflected in recent economic indicators.
Headline inflation rose to double digits in April and May, while core inflation also edged up. Moreover, economic activity is showing some signs of moderation, reflecting the impact of elevated prices, austerity measures, and prevailing economic uncertainty. Meanwhile, external account pressures remain moderate.
While evaluating the impact of these unfolding developments and risks, the MPC observed that the macroeconomic outlook is broadly unchanged from its previous meeting. In this context, the Committee assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5–7 percent over the medium term.
The Committee noted the following key developments since its last meeting. First, real GDP growth for FY26 is provisionally estimated at 3.7 percent by PBS. Second, confidence among both consumers and businesses recovered marginally in the latest sentiment surveys, while inflation expectations eased somewhat.
Third, the successful completion of IMF reviews under the EFF and RSF, coupled with ongoing disbursements, increased SBP’s foreign exchange reserves to $17.2 billion as of June 5, 2026. Fourth, the government has estimated a primary balance surplus of 2.5 percent of GDP for FY26 and is targeting a surplus of 2.0 percent of GDP for FY27.
Lastly, the Middle East conflict has begun to impact macroeconomic conditions in many economies, and a growing number of central banks have started raising their policy rates.
The MPC noted that proactive macroeconomic management—underpinned by forward-looking monetary policy and consistent fiscal consolidation—has helped sustain macroeconomic stability despite the prolonged Middle East conflict.
The Committee remains committed to achieving price stability and will closely monitor incoming data and evolving developments. It also reiterated that accelerating structural reforms is essential to strengthening the economy’s resilience to supply shocks, enhancing productivity, and creating conditions for higher and more sustainable economic growth.
According to provisional PBS estimates, real GDP grew by 3.7 percent in FY26, up from 3.2 percent in FY25. The MPC observed that this outcome reflects the impact of the Middle East conflict and austerity measures, as pre-conflict growth momentum was notably stronger.
Growth in FY26 was primarily driven by the services and industrial sectors, with a meaningful contribution from agriculture.
Large-scale manufacturing recorded strong growth of 6.5 percent during July–March FY26, though it is expected to moderate in Q4 FY26, based on recent trends in high-frequency indicators. Looking ahead, the MPC expects spillovers from the conflict to continue weighing on activity in both industry and services in the coming months.
This, along with subdued agricultural prospects—indicated by early information on Kharif crops amid challenging weather conditions—may weigh on the FY27 growth outlook.
The current account posted a deficit of $0.3 billion in April, bringing the cumulative deficit to $0.2 billion during July–April FY26. This was mainly driven by a widening trade deficit due to a surge in energy imports in April, which more than offset resilient workers’ remittances.
Strong remittance inflows in May are expected to contain the current account deficit in FY26 toward the lower end of the earlier projected range, despite the challenging external environment. On the financing side, increased official inflows provided critical support in meeting external obligations. These developments have facilitated ongoing foreign exchange purchases and a buildup in SBP reserves, which are projected to reach $18 billion by end-June 2026.
Notwithstanding a likely widening of the current account deficit in FY27, the MPC noted that reserve accumulation is expected to continue, supported by FX purchases and timely realization of planned official inflows.
Fiscal data for July–March FY26 shows that consolidation efforts remained broadly on track, primarily driven by expenditure restraint. However, revenue growth slowed compared to the same period last year. In this context, the Federal Board of Revenue (FBR) has revised its target to around Rs13 trillion for FY26.
Despite the downward revision in revenues, the government expects to achieve a primary surplus of 2.5 percent of GDP by containing expenditures.
For FY27, it is targeting a primary surplus of 2.0 percent of GDP. The MPC emphasized the importance of sustaining fiscal consolidation and reiterated the need for timely structural reforms, particularly measures to broaden the tax base and reform public sector enterprises (PSEs).
Since the last MPC meeting, broad money (M2) growth moderated to 14.3 percent year-on-year as of May 29, 2026, from 14.5 percent on April 10, 2026. This decline was entirely due to slower NDA growth, reflecting reduced net budgetary borrowing from the banking system.
Meanwhile, private sector credit grew by around 13 percent, driven by increases in working capital, fixed investment, and consumer financing. At the same time, improved external conditions led to faster NFA growth. On the liability side, currency in circulation increased, partly due to seasonal Eid-related withdrawals, resulting in a higher currency-to-deposit ratio.
Headline inflation rose sharply from 7.3 percent in March to 10.9 percent year-on-year in April and 11.7 percent in May. Apart from a low base effect, the Middle East conflict contributed to inflation through higher domestic energy prices and indirectly through rising transportation and production costs.
This also pushed core inflation up to 8.2 percent in April and 8.7 percent in May. Additionally, an unexpected surge in wheat and wheat product prices significantly increased food inflation over the past two months.
The MPC assessed that inflation may remain in double digits in the coming months before gradually easing thereafter. However, this outlook is subject to several risks, including geopolitical developments, the extent of global-to-domestic fuel price pass-through, adjustments in power and gas tariffs, potential fiscal slippages, and volatile food prices amid weather-related uncertainties.
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