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The State Bank of Pakistan (SBP) has announced its decision to keep the key policy rate unchanged at 11 percent, marking the third consecutive policy meeting where rates have been held steady. The decision came after the Monetary Policy Committee (MPC) convened for its final meeting of fiscal year 2024-25, aiming to balance inflation control with economic growth support.
The MPC noted a favorable decline in inflationary pressures in June but flagged renewed risks arising from energy price adjustments and external vulnerabilities. Despite this, the central bank expressed confidence that inflation will remain within its target range in the months ahead.
Inflation Slows but Energy Tariffs Pose New Risks
In its statement, the MPC highlighted that headline inflation dropped to 3.2 percent year-on-year in June 2025, compared to 3.5 percent in May, driven mainly by falling food prices and a marginal decline in core inflation, which stood at 7.6 percent.
However, the Committee warned that inflationary pressures could re-emerge due to significant increases in gas tariffs, the rollback of temporary electricity subsidies, and rising motor fuel costs. These developments, it noted, could push inflation temporarily above the targeted 5–7 percent range in some months of FY26.
Still, the overall inflation outlook remains manageable, with the MPC expecting price stability to hold barring any major external shocks.
Key Economic Indicators Show Signs of Recovery
The SBP reported that economic activity has continued to recover steadily, supported by the lagged impact of earlier monetary easing and improving financial conditions. High-frequency indicators, such as auto sales, fertilizer offtake, private sector credit growth, and the Purchasing Managers’ Index (PMI), all pointed to a pickup in demand and production.
The Large-Scale Manufacturing (LSM) sector posted positive growth in April and May after months of contraction, while the agriculture sector is expected to benefit from timely rainfall and favorable conditions for major crops.
The services sector is also projected to gain traction due to stronger performance in commodity-producing sectors. Real GDP growth is projected between 3.25 and 4.25 percent for FY26, up from the provisional 2.7 percent recorded in FY25.
External Sector: Surplus Maintained but Trade Risks Loom
Pakistan’s external position remained stable, with the current account registering a $328 million surplus in June. This brought the cumulative surplus for FY25 to $2.1 billion, equivalent to 0.5 percent of GDP.
The improvement was largely driven by robust remittance inflows, which offset the growing trade deficit. Additionally, official inflows and a better credit rating helped boost foreign exchange reserves, which crossed the $14 billion mark.
However, the MPC cautioned that the current account could slip into a mild deficit of up to 1 percent of GDP in FY26 due to stronger domestic import demand, softening global demand, and weaker export prices, particularly for rice. Despite this, SBP expects FX reserves to rise further to $15.5 billion by the end of December 2025.
Fiscal and Revenue Outlook: Cautious Optimism
The central bank acknowledged improvements in the fiscal position during FY25, as both the primary and overall budget balances exceeded their revised targets. The Federal Board of Revenue (FBR) posted collections of Rs11.7 trillion—Rs200 billion short of its revised estimate but still reflecting a 26 percent year-on-year growth.
For FY26, the government is targeting a primary surplus of 2.4 percent of GDP, a goal that hinges on continued tax and non-tax revenue expansion and disciplined spending. The MPC emphasized the need for ongoing fiscal consolidation to reinforce macroeconomic stability and sustain investor confidence.
Money and Credit Growth Reflect Economic Momentum
Broad money (M2) growth accelerated to 14.0 percent year-on-year as of July 11, up from 12.6 percent at the previous MPC meeting. This was mainly attributed to higher Net Foreign Assets (NFA) following the buildup in foreign exchange reserves.
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Private sector credit expanded by 12.8 percent, with growth seen across working capital financing, fixed investments, and consumer loans. The key beneficiaries included the textile, telecom, and retail trade sectors, reflecting improved economic sentiment and enhanced access to credit.
The SBP also noted a rise in the currency-to-deposit ratio in July, which had previously declined in June. To stabilize liquidity conditions, the central bank injected additional funds into the banking system to keep the interbank rate aligned with the policy rate.
Outlook: Balanced Approach to Monetary Policy
Looking ahead, the MPC reiterated its cautious but supportive stance on monetary policy. While inflation remains under control for now, the Committee highlighted several risks, including:
- Volatility in global commodity markets
- Further adjustments in domestic energy tariffs
- Potential disruptions from extreme weather events or flooding
In conclusion, the SBP’s decision to hold the interest rate steady reflects its commitment to maintaining a balance between price stability and supporting growth. As Pakistan navigates a complex economic landscape marked by global uncertainties and domestic reform needs, prudent monetary and fiscal coordination will be critical in sustaining recent gains.
