Karachi, October 27, 2025: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) announced today that it will keep the policy rate steady at 11 percent, signaling a cautious approach to monetary policy amid rising inflation and improving economic indicators.
This decision, aimed at maintaining price stability, comes as headline inflation surged to 5.6 percent in September 2025, driven by flood-related food price increases and volatile energy costs, while core inflation held steady at 7.3 percent.
Economic Outlook Improves Despite Challenges
The MPC noted that the macroeconomic outlook has strengthened since its last meeting, with real GDP growth for FY25 revised upward to 3 percent from 2.7 percent by the Pakistan Bureau of Statistics (PBS). High-frequency economic indicators (HFIs) reflect robust growth, particularly in agriculture and industry. Kharif crop estimates remained stable despite recent floods, supported by healthier vegetation cover and improved input conditions. The Large-Scale Manufacturing (LSM) sector also expanded by 4.4 percent in July-August FY26, a significant improvement from last year’s contraction.
However, uncertainties persist due to volatile global commodity prices, evolving export tariff dynamics, and potential domestic food supply disruptions. The MPC emphasized that the real policy rate remains adequately positive to stabilize inflation within the target range of 5–7 percent over the medium term.
External Sector Shows Resilience
Pakistan’s external sector demonstrated resilience, with the current account posting a $110 million surplus in September 2025, keeping the Q1-FY26 deficit at $594 million. Strong workers’ remittances and net financial inflows bolstered SBP’s foreign exchange reserves, which reached $14.5 billion as of October 17, 2025. The MPC projects reserves to climb to $15.5 billion by December 2025 and $17.8 billion by June 2026, supported by a contained current account deficit (0–1 percent of GDP) and planned official inflows. A recent staff-level agreement with the IMF on the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) reviews further strengthens the external outlook.
Fiscal Discipline and Private Sector Growth
Fiscal performance in Q1-FY26 was marked by a 12.5 percent year-on-year increase in tax collection, though it fell short of the target by Rs198 billion. Higher non-tax revenues, driven by SBP profits and petroleum development levy (PDL) collections, are expected to result in fiscal and primary balance surpluses. The MPC underscored the importance of fiscal discipline to meet rehabilitation needs post-floods and ensure long-term sustainability.
On the monetary front, broad money (M2) growth slowed to 12.3 percent as of October 10, reflecting fiscal consolidation and reduced borrowing by non-bank financial institutions. Private sector credit (PSC) surged by 17 percent, driven by demand in textiles, telecommunications, chemicals, and retail trade, signaling a robust economic recovery.
Inflation Pressures and Future Outlook
Headline inflation’s rise to 5.6 percent in September was attributed to flood-induced food price spikes and sticky core inflation. However, the MPC noted that the food price surge was milder than in previous flood episodes, with high-frequency data showing a slowdown in price increases for wheat, sugar, and perishables. Inflation is expected to temporarily exceed the 5–7 percent target range in H2-FY26 before stabilizing in FY27. Risks include volatile global commodity prices, energy price adjustments, and uncertainties around wheat and perishable food prices.
Policy Priorities for Sustainable Growth
The MPC stressed the need for coordinated monetary and fiscal policies, alongside structural reforms, to sustain economic growth without stoking inflation or straining the external account. The continued buildup of external and fiscal buffers is seen as critical to absorbing future shocks and supporting economic activity.
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