SBP keeps policy rate unchanged at 11.5%

The State Bank of Pakistan (SBP) kept its policy rate unchanged at 11.5% on Monday as policymakers weighed elevated inflation, uncertain oil prices and the economic impact of the ongoing Middle East conflict.

According to a statement, the central bank's Monetary Policy Committee (MPC) assessed that the macroeconomic outlook has improved from its previous meeting, though it remains susceptible to heightened risks, particularly following the resurgence of conflict in the Middle East.

"Meanwhile, the Committee observed that the earlier de-escalation had led to a decline in global oil prices and a relative ease in supply chain disruptions, which resulted in some improvement in recent economic indicators," read the communique issued by the SBP.

The MPC observed that headline and core inflation moderated in June; however, both remained at elevated levels.

At the same time, incoming high-frequency indicators pointed to some pickup in economic activity, whereas external account pressures remained moderate, it noted.

"Taking into account these developments and evolving risks, 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," according to the SBP.

The SBP has raised the policy rate once this year, by 100 basis points to 11.5% in April — its first increase in nearly three years — after holding ⁠rates steady since October 2025.

That move followed a cumulative 1,150-basis-points reduction from a record high of 22% in ⁠June 2024, as the bank eased aggressively once inflation came under control.

Monday's decision to hold rates ⁠follows a similar decision to keep it at 11.5% at the June meeting as well.

Meanwhile, the MPC noted that proactive macroeconomic management — underpinned by a prudent monetary policy stance and sustained fiscal consolidation — has helped effectively manage the ongoing supply shock and preserve macroeconomic stability, despite a challenging global environment.

It reiterated its commitment to achieve the objective of price stability, stating it will continue to closely monitor incoming data and evolving developments.

The Committee also emphasised the importance of further strengthening external and fiscal buffers, and accelerating structural reforms.

Inflation

Headline inflation eased to 11.1% year-on-year in June from 11.7% in the previous month, primarily attributed to pass-through of the decline in global energy prices to domestic consumers, alongside a favourable electricity tariff adjustment.

Core inflation also moderated to 8.4%, but continues to remain elevated. However, food inflation increased in June following a significant increase in prices of wheat and allied products as well as key perishable items.

"Going forward, the recent increase in global commodity prices, higher input costs and domestic food price pressures, are likely to keep inflation above the target range over the next few months," according to the MPC.

However, inflation is projected to ease gradually and stabilise near the upper bound of the 5% to 7% target range by June 2027, it said.

The outlook is, however, subject to multiple risks, including volatility in global energy prices, unanticipated adjustments in administered energy prices, unfavourable climate conditions and potential fiscal slippages, the MPC noted.

External Sector

The current account posted a deficit of $139 million in the fiscal year 2026, close to the lower bound of the projected range for the year, according to the SBP.

The record workers' remittances partly offset the widening trade deficit amidst the Middle East conflict.

At the same time, the financial account recorded a surplus, helping the central bank strengthen its foreign exchange reserves and significantly reducing forward liabilities.

However, with substantial debt repayments in recent weeks, reserves have reached around $17.3 billion as of July 17.

Going forward, the current account deficit is expected to widen in line with the pickup in economic activity, though it is assessed to remain in the range of 0 to 1% of GDP in the fiscal year 2027.

Workers' remittances are likely to grow as compared to last year and continue financing a large part of the higher projected trade deficit.

With the realisation of planned official inflows and some likely improvement in private flows, SBP's reserves are targeted to increase to $20.20 billion by end-December 2026.