By Staff Reporter
KARACHI: Pakistan’s central bank kept its benchmark interest rate steady at 11% on Wednesday, opting to safeguard the rupee’s stability despite inflation trending below its target range and widespread expectations of a cut.
The decision defied market consensus. A Reuters poll of 15 analysts unanimously predicted a rate cut, nine foresaw a 50-basis-point reduction, four expected 100 basis points, and two anticipated 25 basis points. A separate Bloomberg survey showed a closer divide, with 10 of 33 analysts correctly forecasting no change, while the rest leaned toward easing.
“The Monetary Policy Committee (MPC) … noted that the inflation outlook has somewhat worsened in the wake of higher than anticipated adjustment in energy prices, especially gas tariffs,” the State Bank of Pakistan (SBP) said in a statement.
The decision also reflected concerns about a widening trade deficit, expected to grow in the fiscal year ending June 2026 as economic activity picks up and global trade slows. “Given this macroeconomic outlook and the emerging risks, the MPC considered today’s decision as necessary to ensure price stability,” the central bank added.
The SBP’s move marks a pause in a recent easing cycle. It held rates steady in June after a 100-basis-point cut in May, which followed a March pause. Since June 2024, the bank has slashed its policy rate by 1,100 basis points from a record 22%, responding to easing price pressures.
Headline inflation cooled to 3.2% in June and is projected to rise slightly to 3.5%–4.5% in July, still within the SBP’s 5.5%–7.5% target range for the fiscal year ending June 2026.The government claims the economy has stabilized, but analysts caution that growth remains fragile, with global commodity price swings posing risks to prices and external balances.Voices of Concern
Dr. Salman Shah, former finance minister, tied the rate decision to exchange-rate jitters. “The main reason why the state bank has not dropped the interest rates is the uncertainty about the value of the dollar vis-a-vis the rupee,” he said. “And we saw in the last few days Pakistan taking some administrative actions to try to shore up the value of the rupee and the dealers were called in, the bank presidents were called in. So there was a lot of concern about the value of the rupee and trying to keep it stable.”
Shah noted industry pressure for lower rates but warned of the risks. “In this environment, the demand for decreasing the interest rates by the industry was brought with risk because it could have led to the dollar value going up in comparison to the rupee, and this is against the policy of the government,” he said. “So in a way, the state bank has followed what the government’s concerns are and they are trying to maintain the stability of the rupee in comparison to the dollar.”
He also highlighted the SBP’s market maneuvers. “The State Bank of Pakistan is buying lots of dollars in the market, and that also puts pressure on the value of the rupee,” Shah said. “So in a way, this was a good decision in terms of stability, but of course it will not be welcomed by the industry, which sees that with inflation, even forward-looking inflation at six to seven percent, the rate could have been cut to at least nine percent or somewhere in that region.”
The SBP Governor Jameel Ahmad at a presser also underscored the bank’s efforts to bolster reserves, saying it has snapped up nearly $20 billion from the market over the past three years—a key factor in rebuilding foreign exchange buffers.
Real Sector
High-frequency economic indicators are depicting a gradual economic recovery. This is reflected in notable y/y growth in automobile sales, fertilizer offtake, credit to private sector, imports of intermediate goods and machinery, and purchasing manager’s index in recent months. This improvement in high-frequency indicators has now also started to reflect in LSM data, which showed y/y increase in both April and May after five months of contraction. These trends indicate the improving outlook for the manufacturing sector. Barring flood-related risks, the agriculture sector is also expected to recover in FY26. In particular, the outlook for major crops has somewhat improved from earlier expectations in the wake of better water availability due to recent rainfalls. Improving prospects for commodity-producing sectors will have positive spillover for the services sector as well. Supported by easing financial conditions, positive business sentiments and a gradually strengthening macroeconomic environment, real GDP growth is projected to rise to 3.25 –4.25 percent this year from the provisional estimate of 2.7 percent in FY25.
External Sector
The current account posted a surplus of $328 million in June, bringing the cumulative surplus to $2.1 billion (0.5 percent of GDP) in FY25. Workers’ remittances remained instrumental, as they more than offset the widening trade deficit. On the financing front, a sizable portion of planned official inflows materialized in June, propelling SBP’s foreign exchange reserves beyond $14 billion. Going forward, workers’ remittances are projected to grow at a slower pace amidst high base effect and recent rationalization of home remittances incentive schemes. Meanwhile, the trade deficit is expected to widen due to increased import demand, in line with the improving domestic economic activity, slowdown in global demand and unfavorable export prices – particularly of rice. As a result, the current account deficit is projected in the range of 0 to 1 percent of GDP in FY26. On the financing side, inflows are likely to improve, partly due to higher expected private flows following the recent upgrade in the country’s credit rating. Based on this assessment, the SBP’s FX reserves are projected to rise to $15.5 billion by end-December 2025.
Fiscal Sector
The government’s revised estimates indicate an improvement in the fiscal position for FY25, with both the primary and overall fiscal balances (as percent of GDP) surpassing their respective targets. This improved performance was achieved through a substantial growth in both tax and non-tax revenues. However, despite achieving around 26 percent growth, the revised FBR revenue target was slightly missed. For FY26, the government aims further fiscal consolidation with a targeted primary surplus of 2.4 percent of GDP. Achieving this target will hinge on concerted revenue collection efforts and rationalization of expenditures. The Committee also stressed the importance of continuing with the fiscal consolidation to sustain the macroeconomic gains of the past two years.
Money and Credit
Broad money (M2) growth accelerated to 14.0 percent y/y as of July 11, up from 12.6 percent at the time of the last MPC meeting. This was primarily led by higher contribution from NFA of the banking system due to improved FX reserves. Meanwhile, private sector credit growth accelerated to 12.8 percent y/y, supported by easing financial conditions and improving economic activity. Notably, the expansion in credit was broad-based, with increases noted in working capital loans, fixed investment advances and consumer financing. The key borrowing sectors included textiles, telecommunications, and wholesale and retail trade. Meanwhile, the currency to deposit ratio, which had declined in June, increased in July. As a result, SBP had to enhance its liquidity injections to align the interbank overnight repo rate with the policy rate, which led to an increase in reserve money growth.
Inflation
Inflation was recorded at 3.2 percent y/y in June 2025 against 3.5 percent in May. This deceleration largely reflected moderation in food inflation and a slight reduction in core inflation to 7.6 percent. Furthermore, despite upward revisions in motor fuel prices and electricity tariffs, energy prices remained lower on y/y basis. Going forward, energy inflation is expected to rise from current levels amidst the significant upward adjustment in gas tariffs, phasing out of temporary reduction in electricity tariffs (of Q4-FY25), and recent increase in motor fuel prices. The MPC noted that y/y inflation is expected to mostly remain in the range of 5 – 7 percent in FY26, though it may cross the upper bound in some months. The MPC emphasized that this outlook is susceptible to multiple risks emanating from uncertain global commodity prices and trade outlook, unanticipated adjustments in administered energy prices, and potential widespread floods.
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