SBP keeps policy rate unchanged at 11.5%

September 14, 2026 (MLN): September 14, 2026 (MLN): The Monetary Policy Committee (MPC) has decided to keep the policy rate unchanged at 11.5%, with seven of the ten members backing the decision in its meeting held today, as the Committee judged the current stance appropriate to steer inflation towards the 5-7% target range over the medium term.

The Committee noted that the recent intensification of the prolonged Middle East conflict has driven already elevated global commodity prices further up and prolonged supply chain disruptions, even as domestic macroeconomic data broadly matched the MPC's earlier expectations.

It said uncertainty around the outlook has increased, particularly amid the worsening geopolitical environment.

Key Developments Since Last Meeting

The MPC flagged several developments since its previous sitting. Pakistan's sovereign credit rating was upgraded to B3 by Moody's with a stable outlook, while the country raised $3bn through Eurobonds in international capital markets, which, along with sustained FX purchases, pushed SBP's FX reserves above $21bn.

Inflation expectations among both businesses and consumers rose in September even as their confidence weakened. Large-scale manufacturing output fell 3.5% in June, bringing cumulative FY26 growth to 5.0%.

Fiscal consolidation outpaced budgetary targets during FY26, FBR tax collection stayed on target during July-August FY27, and SBP transferred a higher-than-budgeted profit of Rs1.9tr to the government against a budgeted Rs1.4tr.

The Committee also noted that central banks globally have turned more cautious amid challenging economic conditions.

The MPC reiterated its commitment to price stability, pledging close monitoring of incoming data and developments in the Middle East, and said geopolitical and weather-related shocks have grown more frequent, reinforcing the need for a prudent policy mix, stronger buffers and timely structural reforms to build resilience and support sustainable growth.

Economic Activity Picks Up After Q4 Slowdown

Economic activity, having slowed in Q4-FY26 amid conflict-related disruptions, showed signs of gradual recovery in the following period.

High-frequency indicators, including POL sales, private sector credit, textile exports, business sentiment, and satellite imagery of nighttime lights and gas emissions, pointed to a pickup in activity in July.

Increased acreage under rice and sugarcane, along with encouraging early cotton arrival reports, improved the agriculture sector's prospects, which the Committee said should also benefit services through positive spillovers.

The MPC kept its FY27 real GDP growth projection unchanged at 3.5-4.5%.

External Sector: Reserves Cross $21bn on Eurobond Issuance

The current account deficit in July came in largely in line with the MPC's expectations, as import growth outpaced export gains despite robust workers' remittances. The September Eurobond issuance, combined with sizeable FX purchases by SBP, lifted reserves to $21.4bn.

The Committee expects resilient remittances and higher ICT exports to keep the current account deficit within 0-1% of GDP in FY27, with planned financial inflows and continued FX purchases seen supporting reserves toward a three-month import cover by end-June 2027.

It cautioned that this outlook remains vulnerable to elevated global commodity prices and supply constraints stemming from the Middle East conflict.

Fiscal Sector: Consolidation Exceeds Target, SBP Profit Transfer Lifts Outlook

Fiscal consolidation during FY26 exceeded budgetary targets, led by contained current expenditure, particularly lower interest payments.

Tax collection in the first two months of FY27 matched FBR's targets, though growth decelerated from a year earlier, while the higher-than-budgeted SBP profit transfer of Rs1.9tr improved the fiscal outlook for the year.

The Committee said meeting the tax revenue target would still require sustained effort given an uncertain domestic and global environment, and reiterated the need to accelerate fiscal reforms, particularly broadening the tax base and curbing losses at state-owned enterprises.

Money and Credit: Broad Money Growth Slows as Private Credit Holds Firm

Broad money (M2) growth eased to 11.6% y/y as of August 28, from 13.2% at the time of the last MPC meeting, on lower contributions from both net domestic assets and net foreign assets of the banking system.

Private sector credit grew 13.4% y/y, supported by reduced net budgetary borrowing and the recovery in economic activity, with growth broad-based across working capital, fixed investment and consumer financing; wholesale and retail trade, agriculture and sugar were the major borrowing sectors.

The Committee expects private credit growth to strengthen further as economic activity continues to pick up.

Inflation Rises to 11.1% in August

Headline inflation rose to 11.1% y/y in August from 9.2% in July, driven largely by elevated food prices for wheat and allied products as well as perishable items, while intensifying conflict in the Middle East kept energy inflation elevated and pushed core inflation up to 8.7%.

Inflation expectations among consumers and businesses also rose in the latest surveys.

The Committee noted that a recent change in the HSD pricing mechanism sharply lowered its price in August, partially offsetting the impact of higher global prices on domestic inflation, while positive real interest rates on a forward-looking basis are expected to keep demand-side pressures and second-round effects from food and energy inflation in check.

The MPC's inflation outlook for FY27 remains broadly unchanged, with inflation expected to ease gradually towards the upper bound of the 5-7% target range by June 2027, though it said risks to this outlook have increased significantly, citing volatility in global commodity prices, the scale of electricity and gas tariff adjustments, supply disruptions, and unpredictable food price movements amid worsening El Niño conditions.

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