KARACHI: In its first meeting of the fiscal year 2026-27, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has decided to hold the key interest rate steady at 11.5%, maintaining the status quo for the second consecutive month.
The decision, announced on Monday, reflects a cautious central bank navigating a complex landscape of improving domestic fundamentals against a backdrop of escalating international crises.
The committee assessed that while the macroeconomic outlook has improved since its previous meeting, it remains susceptible to volatility in global commodity prices and uncertain weather conditions.
Headline inflation eased to 11.1 percent in June from 11.7 percent the previous month, primarily due to the pass-through of declining global energy prices to domestic consumers and favorable electricity tariff adjustments. Core inflation also moderated to 8.4 percent but remains elevated.
The MPC expects real GDP growth to range between 3.5 and 4.5 percent during fiscal year 2027, supported by budgetary incentives, continued import tariff rationalization and a pickup in private sector credit. However, risks from volatile global commodity prices and evolving El Niño effects may weigh on growth prospects, the committee said.
Pakistan’s current account posted a deficit of $139 million in fiscal year 2026, close to the lower bound of the projected range. Record workers’ remittances partly offset a widening trade deficit amid the Middle East conflict. The SBP’s foreign exchange reserves surpassed the end-June 2026 target of $18 billion but have since declined to approximately $17.3 billion as of July 17 following substantial debt repayments.
The Federal Board of Revenue achieved its revised tax collection target of Rs13.0 trillion by the end of FY26, and the primary balance remained in surplus for the third consecutive year. The overall fiscal deficit was significantly lower than the previous year.
The MPC reiterated its commitment to achieving price stability and guiding inflation toward the target range of 5 to 7 percent over the medium term. The committee emphasized the importance of further strengthening external and fiscal buffers and accelerating structural reforms to strengthen resilience to recurring shocks and support higher sustainable economic growth.
Inflation is projected to ease gradually and stabilize near the upper bound of the target range by June 2027, subject to risks including volatility in global energy prices, unanticipated adjustments in administered energy prices, unfavorable climate conditions and potential fiscal slippages.
While domestic economic indicators show signs of stabilization, analysts point to a volatile global environment as the primary factor behind the SBP’s decision to pause. Escalating geopolitical tensions in the Middle East, particularly the intensifying US-Iran conflict, and the associated risks of surging oil prices are overshadowing the arguments for monetary easing.
In a research note, AKD Securities highlighted the dichotomy facing policymakers. On one hand, Pakistan’s external account remains comfortable, supported by a tight monetary policy, prudent fiscal management, an improving credit rating, and continued progress on structural reforms. These factors are viewed as positive indicators of economic resilience.
However, the brokerage firm also noted weakening leading economic indicators and a contraction in money supply, which together strengthen the case for a supportive, accommodative monetary policy to stimulate growth.
“The renewed geopolitical tensions following the escalation of the US-Iran conflict, including the re-closure of the Strait of Hormuz and Houthi threats of a naval blockade targeting Saudi Arabia, have heightened uncertainty significantly,” AKD Securities stated in its report.
This global uncertainty is compounded by a domestic threat: weather forecasters are predicting severe floods during the last week of this month. The combination of potential supply chain disruptions from geopolitical strife, volatile energy prices, and the risk of agricultural devastation from flooding has renewed concerns over inflationary pressures, compelling the central bank to maintain its cautious approach for the time being.
