SBP keeps policy rate unchanged at 11.5%

July 27, 2026 (MLN): The Monetary Policy Committee (MPC) has unanimously decided to keep the policy rate unchanged at 11.5% in its meeting held on July 27, 2026, assessing that the current stance remains appropriate to steer inflation towards the 5-7% target range over the medium term.

The Committee noted that the macroeconomic outlook has improved since its last meeting, though it remains exposed to heightened risks, particularly from the resurgence of conflict in the Middle East.

It observed that the earlier de-escalation had led to a decline in global oil prices and some easing in supply chain disruptions, contributing to improvement in recent economic indicators.

Headline and core inflation moderated in June, though both remained elevated, while incoming high-frequency indicators pointed to some pickup in economic activity, and external account pressures stayed moderate.

Key Developments Since Last Meeting

The MPC flagged several developments since its previous sitting. SBP's FX reserves surpassed the end-June 2026 target of $18bn, driven largely by continued FX purchases amid a small current account deficit in FY26 and realisation of planned official inflows.

Pakistan's sovereign credit rating was upgraded to "B" by Standard & Poor's, while inflation expectations eased for both consumers and businesses in the latest sentiment surveys, even as confidence indicators showed a mixed picture.

FBR met its revised tax revenue target for FY26, and the IMF raised its global inflation forecast for both CY26 and CY27 in its latest World Economic Outlook, citing a rise in global commodity prices.

The Committee said 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 price stability and pledged to keep monitoring incoming data, while stressing the need to further strengthen external and fiscal buffers and accelerate structural reforms to build resilience, enhance productivity and support higher, sustainable growth.

Economic Activity Slows in Q4, Recovery Signs Emerge in June

Economic activity recorded some slowdown in Q4-FY26 in the wake of the Middle East conflict, a surge in global energy prices, and government austerity measures. However, high-frequency indicators  including satellite imagery, automobile sales, cement dispatches, fertilizer offtake and business sentiments  pointed to some recovery in June.

The agriculture outlook has also improved somewhat from the previous assessment, with an initial estimate of a significant rise in expected sugarcane output likely to more than offset lower projected cotton production.

The Committee said better prospects for commodity-producing sectors would generate positive spillovers for services, while budgetary incentives, continued import tariff rationalization and a pickup in private sector credit are expected to further support activity.

The MPC projected real GDP growth in the range of 3.5-4.5% during FY27, cautioning that volatile global commodity prices amid a reescalation of Middle East tensions, along with uncertain weather conditions including evolving El Niño effects, could weigh on the growth outlook.

External Sector: Reserves Build Up Despite Debt Repayments

The current account posted a deficit of $139mn in FY26, close to the lower bound of the projected range, as record workers' remittances partly offset a widening trade deficit amid the Middle East conflict.

The financial account recorded a surplus, helping SBP strengthen its FX reserves and significantly reduce forward liabilities. However, substantial debt repayments in recent weeks brought FX reserves down to around $17.3bn 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 projected to remain in the range of 0-1% of GDP in FY27.

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

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

Fiscal Sector: FBR Meets Revised Target, Primary Surplus Holds

FBR achieved its revised tax collection target of Rs13.0tr by the end of FY26, with the primary balance estimated to have remained in surplus for the third consecutive year, while the overall fiscal deficit is estimated to have turned out significantly lower than the previous year.

Fiscal consolidation is expected to continue in FY27, with the primary surplus targeted at 2.0% of GDP and the overall fiscal deficit targeted at 3.6% of GDP.

The Committee said achieving these targets would require sustained progress in revenue mobilization and expenditure discipline amid an uncertain domestic and global environment, re-emphasizing the need for fiscal reforms, particularly tax base-broadening efforts and curtailing losses at state-owned enterprises.

Money and Credit: Private Sector Credit Accelerates

Broad money (M2) growth moderated to 13.2% y/y as of July 10, from 15.2% at the time of the last MPC meeting, reflecting lower contributions from both net domestic assets (NDA) and net foreign assets (NFA) of the banking system.

Within NDA, growth in net budgetary borrowing slowed, while private sector credit growth accelerated to 14.9%, supported by easing financial conditions, with growth broad-based across working capital, fixed investment and consumer financing.

The major borrowing sectors included textiles, telecommunications, and wholesale and retail trade.

The Committee also noted a moderation in reserve money growth, mainly reflecting the post-Eid reversal in currency in circulation, which, along with robust growth in bank deposits, contributed to a decline in the currency-to-deposit ratio.

Inflation Eases to 11.1% in June

Headline inflation eased to 11.1% y/y in June 2026 from 11.7% in the previous month, primarily attributable to the pass-through of the decline in global energy prices to domestic consumers, alongside a favorable electricity tariff adjustment.

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

Going forward, the Committee said 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, before easing gradually and stabilizing near the upper bound of the 5-7% target range by June 2027.

This outlook remains subject to risks including volatility in global energy prices, unanticipated adjustments in administered energy prices, unfavorable climate conditions and potential fiscal slippages.

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