The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has decided to keep the key policy rate unchanged at 11 per cent.
The MPC made this decision at its meeting held on Monday. The Committee noted that inflation remained relatively moderate in both July and August, whereas core inflation continued to decline at a slower pace.
Economic activity – as captured by high-frequency economic indicators, including large-scale manufacturing (LSM) – gained further momentum. However, the near-term macroeconomic outlook has deteriorated slightly in the wake of the ongoing floods. This temporary yet significant flood-induced supply shock, particularly to the crop sector, may push up headline inflation and the current account deficit from earlier expectations in FY26.
Meanwhile, economic growth is projected to moderate compared to the previous assessment. In view of the evolving macroeconomic outlook and the flood-related uncertainty, the MPC deemed today’s decision appropriate to maintain price stability.
The MPC observed that the economy is on a significantly stronger footing to withstand the negative fallout of the ongoing floods as compared to previous major flood events. Given the low inflation environment, moderately growing domestic demand and relatively benign global commodity price outlook, the excessive inflationary and external account pressures witnessed after the previous floods are projected to remain in check this time.
Furthermore, the build-up in external and fiscal buffers over the past two years, which was achieved via a coordinated and prudent monetary and fiscal policy mix, will need to continue to make the economy more resilient to shocks and ensure higher growth on a sustainable basis.
The Committee noted the following key developments since its last meeting. First, SBP’s FX reserves remained stable, despite net debt repayments and a current account deficit. Second, inflation expectations of both consumers and businesses inched up in September in the SBP-IBA sentiment surveys. Third, FBR tax collection fell slightly short of the target during July-August 2025, though it grew significantly on y/y basis. Lastly, the announcement of revised import tariffs by the US has led to some reduction in global trade uncertainty.
In view of these developments and outlook, the MPC assessed that the real policy rate remains adequately positive to stabilise inflation within the medium-term target range of 5 – 7 per cent, notwithstanding some expected short-term volatility in inflation outturns.
Incoming data of high-frequency indicators – such as machinery and intermediate goods imports, automobile and cement sales, private sector credit (PSC) and business confidence – continue to point toward strong underlying economic momentum from H2-FY25 onwards. Reflecting this momentum, LSM registered 3 per cent y/y growth in Q4-FY25, after reporting contraction in the previous three quarters. However, the recent floods have moderated the overall growth outlook for FY26.
Based on the currently available information, including satellite imagery, Kharif crops have incurred losses. These losses, together with flood-related supply chain disruptions, may also dampen activity in the manufacturing and services sectors in the near term. At the same time, the prospects for Rabi crops have somewhat improved in the wake of a likely increase in post-flood yields. Taking into account these developments, real GDP growth for FY26 is assessed to remain close to the lower end of the earlier projected range of 3.25 to 4.25 per cent.
The current account recorded a deficit of $254 million in July 2025, led by an increase in imports amidst a pickup in economic activity and some moderation in remittances. Despite this deficit and weak financial inflows, SBP’s FX reserves remained stable at around $14.3 billion as of September 5. Looking ahead, the external sector outlook remains susceptible to evolving domestic and global conditions.
