The State Bank of Pakistan’s Monetary Policy Committee on Monday kept the policy rate unchanged at 11%, opting to leave borrowing costs steady.

The decision marks the fourth consecutive meeting with no change, extending the pause in monetary easing as policymakers weigh potential inflation pressures against signs of a fragile economic recovery.

The policy committee had reduced the interest rate by 1 percentage point to 11% in its meeting on May 5 this year.

Outlook improves as flood impact eases, risks persist

The MPC noted that headline inflation rose to 5.6% in September from 3.0% in August, while core inflation remained at 7.3%. The Committee assessed that flood damage to the broader economy has been smaller than previously feared, with crop losses likely contained, minimal supply disruptions, and high-frequency indicators showing firmer momentum.

With the earlier reduction still transmitting through the economy, the MPC judged the real policy rate “adequately positive” to guide inflation toward the 5–7% medium-term target, even as risks persist from volatile global commodities, evolving tariff dynamics that could challenge exports, and potential domestic food-supply frictions.

Since the last meeting, several developments shaped the outlook. The Pakistan Bureau of Statistics (PBS) revised Fiscal Year 2025 (FY25) gross domestic product (GDP) growth to 3.0% from 2.7%. Initial estimates for major Kharif crops remained close to last year’s production despite floods. Notably, the State Bank of Pakistan (SBP) foreign exchange (FX) reserves continued to increase even after repayment of a US$500 million Eurobond.

Pakistan reached a staff-level agreement with the International Monetary Fund (IMF) on reviews of the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF).

Meanwhile, inflation expectations of consumers and businesses softened in the latest State Bank of Pakistan–Institute of Business Administration (SBP–IBA) sentiment surveys, while global commodity prices showed mixed trends and heightened oil volatility.

Reserves climb as momentum sets

Recent high-frequency indicators point to sustained growth momentum, the statement noted. Major Kharif estimates turned out better than expected, corroborated by satellite imagery showing healthier vegetation. Improved input conditions and an expected post-flood yield uptick support better prospects for Rabi crops.

In industry, Large-Scale Manufacturing (LSM) expanded 4.4% year-on-year in July–August Fiscal Year 2026 (FY26), versus a marginal contraction a year earlier.

Stronger sales of automobiles, cement, fertilisers and petroleum, oil and lubricants (POL) products, alongside firmer private-sector credit and improved business sentiment, have lifted the industrial outlook, with spillovers expected into services. On current trends, real GDP growth is now assessed to be in the upper half of the previously projected 3.25%–4.25% range.

The current account (CA) recorded a US$110 million surplus in September 2025, limiting the first quarter (Q1) of FY26 deficit to US$594 million, broadly in line with expectations. Exports continued to grow moderately, while faster-rising imports widened the trade gap; workers’ remittances remained resilient.

Together with net financial inflows, this lifted SBP FX reserves to US$14.5 billion as of October 17. Looking ahead, imports are likely to gain traction with activity, though flood-related import needs seem lower than earlier assumed, and the outlook for remittances has improved.

Overall, the current account deficit (CAD) is projected at 0–1% of GDP in FY26, with FX reserves expected to reach US$15.5 billion by December 2025 and around US$17.8 billion by June 2026, assuming planned official inflows.

In Q1-FY26, tax collection grew 12.5% year-on-year to Rs2.9 trillion, Rs198 billion below target. Higher SBP profit transfers and Petroleum Development Levy (PDL) receipts should bolster non-tax revenue, according to the statement.

Both the overall balance and the primary balance are likely to post surpluses for the quarter. The MPC expects post-flood rehabilitation to be financed within budgeted resources and reiterated the need for continued fiscal discipline to meet balance targets and secure long-term sustainability.

Broad money (M2) growth decelerated to 12.3% as of October 10, driven by a decline in the banking system’s net domestic assets, mainly due to sharply slower bank credit to non-bank financial institutions (NBFIs).

Net budgetary borrowing remained contained, creating space for the private sector: private-sector credit (PSC) growth rose to 17%, broad-based across working capital, fixed investment and consumer loans, with notable demand from textiles, telecommunications, chemicals, and wholesale/retail trade.

On the liability side, currency in circulation rose year-on-year while deposit growth decelerated, lifting the currency-to-deposit ratio (CDR) to 37.6% and keeping reserve money growth elevated.

The rise in headline inflation to 5.6% in September reflected flood-related food price increases, an uptick in energy prices, and sticky core inflation. Unlike past flood episodes, the food-price surge appears milder than feared, with the Sensitive Price Indicator (SPI) showing slower increases in wheat and allied products, sugar, and perishables.

The MPC nevertheless expects inflation to exceed the 5–7% band for a few months in the second half (H2) of FY26 before reverting to the target range in FY27. Key risks cited by the MPC include global commodity volatility, the timing and magnitude of future energy-price adjustments, and uncertainty around prices of wheat and perishable food items.