By Staff Reporter
KARACHI: Pakistan’s central bank held its benchmark interest rate steady at 11.5% on Monday, resisting pressure from industry to ease monetary conditions even as the Gulf conflict that drove its last rate increase shows signs of waning.
The Monetary Policy Committee, meeting for the fourth time this fiscal year, voted to maintain the policy rate at a level that has left manufacturers and exporters fuming since the central bank raised it by 100 basis points in April. The decision was broadly anticipated by markets.
In its statement, the MPC acknowledged that global oil prices have retreated from their conflict-driven peaks, but argued the macroeconomic picture had not shifted enough to warrant a change in stance. “Global oil prices have eased following recent positive geopolitical developments, yet they remain elevated compared to pre-conflict levels,” the committee said. “The MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7% over the medium term.”
Inflation Climbs, Growth Slows
The hold comes against a complicated economic backdrop. Headline inflation surged from 7.3% in March to 10.9% in April, then to 11.7% in May — a move the MPC attributed to the direct and indirect effects of the Middle East conflict, which pushed up domestic energy prices and raised transportation and production costs. Core inflation tracked higher too, reaching 8.2% in April and 8.7% in May.
An unexpected spike in wheat and flour prices has added to food inflation pressures over the past two months. The MPC projected that inflation would remain in double digits for the next several months before gradually subsiding, while flagging a range of risks to that outlook, including geopolitical flare-ups, the pace of fuel price pass-through, tariff adjustments in the power and gas sectors, potential fiscal slippage, and weather-related crop disruptions.
Economic activity, meanwhile, is showing signs of softening. Real GDP growth for FY26 was provisionally estimated at 3.7% by the Pakistan Bureau of Statistics — an improvement from 3.2% in FY25, though the MPC was careful to note that the pre-conflict trajectory had been “notably higher.” The committee said the conflict’s spillovers may continue to weigh on both the industrial and services sectors in the months ahead. Large-scale manufacturing, however, posted growth of 6.5%.
Reserves Rise, Fiscal Position Improves
On the brighter side, the completion of IMF reviews for both the Extended Fund Facility and the Resilience and Sustainability Facility — alongside steady foreign exchange purchases — lifted the State Bank’s reserves to $17.2 billion as of June 5. Consumer and business confidence ticked marginally higher in the latest sentiment surveys, and inflation expectations eased somewhat.
The government posted a primary budget surplus estimated at 2.5% of GDP for FY26 and is targeting a 2.0% surplus for FY27, with fiscal consolidation described by the MPC as “broadly on track” and driven primarily by expenditure restraint. Broad money growth moderated to 14.3% year-on-year as of May 29, down from 14.5% in mid-April, reflecting slowing net budgetary borrowing from the banking system. Private sector credit grew 13%, led by working capital, fixed investment, and consumer financing.
Market Expectations Were Mixed
Ahead of the meeting, a poll by brokerage Topline Securities found opinion nearly evenly split, with 49% of respondents expecting the rate to hold and 49% anticipating a hike — with 34% forecasting a 50 basis-point increase and 15% a full 100 basis-points. Just 2% expected any easing.
The brokerage had backed the hold. “Our view of the status quo is backed by efforts and steps taken by involving parties in the war and active mediation by Pakistan,” Topline said.
The Pakistan Institute of Development Economics echoed the cautious consensus, noting that “easing oil-price and geopolitical pressures have reduced the probability of another increase, whereas still-elevated inflation and expectation risks make a rate cut premature.”
Faisal Mamsa, chief executive of Tresmark, had flagged before the decision that the committee would likely weigh currency stability and the external account trajectory before moving rates in either direction.
Industry Pushes Back
Business groups wasted little time in criticising the decision. Atif Ikram Sheikh, president of the Federation of Pakistan Chambers of Commerce and Industry, called the hold “highly detrimental to the nation’s economic survival,” warning that failure to ease borrowing costs would accelerate de-industrialisation and undercut export targets.
“The decision to hold the policy rate is unfortunate, despite a clear downward expectation in inflation numbers on the back of the impending US-Iran peace deal being facilitated by Pakistan, and gradual normalisation of global energy supplies,” Sheikh said.
The MPC, for its part, urged an acceleration of structural reforms as “imperative” for building economic resilience against supply shocks and creating the conditions for more durable growth — language that stops well short of the immediate rate relief industry is demanding. The committee said it would continue to monitor incoming data and evolving developments closely.
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