SBP Keeps Policy Rate Unchanged At 11% To Ensure Price Stability

The State Bank of Pakistan (SBP), on Wednesday, decided to keep the policy rate unchanged at 11% while emphasizing the continuity of ongoing prudent stance to sustain macroeconomic stability and stabilize inflation in the target range

KARACHI, (UrduPoint / Pakistan Point News - 30th Jul, 2025) The State Bank of Pakistan (SBP), on Wednesday, decided to keep the policy rate unchanged at 11% while emphasizing the continuity of ongoing prudent stance to sustain macroeconomic stability and stabilize inflation in the target range.

The State Bank Governor, Jameel Ahmed, announced the decision of the Monetary Policy Committee (MPC) of the central bank in a press conference here at SBP building and also shared projections of GDP Growth, inflation and current account balance and external debt management situation during the new fiscal year 2025-26.

Besides, the Monetary Policy statement issued by SBP, citing ‘uncertain global commodity prices and trade outlook, unanticipated adjustments in administered energy prices, and potential widespread floods’ and overall macroeconomic outlook, termed the decision as necessary to ensure price stability.

The MPC also emphasized the need to continue the ongoing prudent monetary and fiscal policy mix to sustain macroeconomic stability, and underscored the importance of structural reforms in achieving higher growth on a sustainable basis.

The Committee noted that lower food prices led to a deceleration in inflation in June 2025 to 3.2 percent and core inflation declined slightly. Though the energy price adjustments affected the outlook the inflation is projected to stabilize in the target range, the MPC assessed.

Moreover, economic activity is gaining further traction amidst the still-unfolding impact of the earlier reductions in the policy rate. At the same time, the Committee noted that the trade deficit is expected to widen further in FY26 amidst the pickup in economic activity and slowdown in global trade.

The Committee reviewed key developments since its last meeting like surge in the SBP’s Foreign Exchange reserves above $14 billion; the recent upgrade in Pakistan’s sovereign credit rating, a decline in Euro bond yields, narrowed CDS spreads in international markets, mixed inflation expectations shown in the latest sentiment surveys, shortfall in collection of FBR tax revenue for FY25- recorded as Rs 11.7 trillion- and volatility in global oil prices, and the uncertainty as to global trade tariffs that prompted central banks to maintain their cautious monetary policy stance.

The MPC, in view of these developments and potential risks, assessed that the real policy rate should continue to be adequately positive to stabilize inflation in the target range of 5-7 %. The trade deficit is expected to widen due to increased import demand, in line with the improving domestic economic activity, slowdown in global demand and unfavorable export prices, particularly of rice.

The MPC projected the current account deficit in the range of 0 to 1 percent of GDP in FY26, while on the financing side, inflows are likely to improve, partly due to higher expected private flows following the recent upgrade in the country’s credit rating. Based on this assessment, the SBP’s FX reserves are projected to rise to $15.5 billion by end-December 2025.

In the Real Sector, high-frequency economic indicators are depicting a gradual economic recovery, reflected in growth in automobile sales, fertilizer offtake, credit to private sector, imports of intermediate goods and machinery, and purchasing manager’s index in recent months.

This improvement has now also started to reflect in LSM data, which showed y/y increase in both April and May after five months of contraction.

These trends indicate the improving outlook for the manufacturing sector, the MPC observed.

The Committee was also hopeful of recovery of the agriculture sector in FY26, barring flood-related risks, as the outlook for major crops has somewhat improved from earlier expectations in the wake of better water availability due to recent rainfalls.

“Improving prospects for commodity-producing sectors will have positive spillover for the services sector as well. Supported by easing financial conditions, positive business sentiments and a gradually strengthening macroeconomic environment, real GDP growth is projected to rise to 3.25 to 4.25 percent this year from the provisional estimate of 2.7% in FY25,” the MPC forecast.

The current account posted a surplus of $328 million in June, bringing the cumulative surplus to $2.1 billion (0.5 percent of GDP) in FY25 while Workers’ Remittances remained instrumental, as they more than offset the widening trade deficit, the Committee observed, adding that on the financing front, a sizable portion of planned official inflows materialized in June, propelling SBP’s foreign exchange reserves beyond $14 billion.

The Committee noted that, in the Fiscal Sector, the government’s revised estimates indicate an improvement in the fiscal position for FY25, with both the primary and overall fiscal balances (as percent of GDP) surpassing their respective targets.

“This improved performance was achieved through a substantial growth in both tax and non-tax revenues. However, despite achieving around 26 percent growth, the revised FBR revenue target was slightly missed”, the MPC pointed out and added that for FY26, the government aims for further fiscal consolidation with a targeted primary surplus of 2.4 percent of GDP which requires concerted revenue collection efforts and rationalization of expenditures. The Committee also stressed the importance of continuing with the fiscal consolidation to sustain the macroeconomic gains of the past two years.

The committee also noted growth in Broad money (M2) to 14% primarily led by higher contributions from NFA of the banking system due to improved FX reserves. Meanwhile, private sector credit growth accelerated to 12.8% supported by easing financial conditions and improving economic activity.

Meanwhile, the currency to deposit ratio, which had declined in June, increased in July. As a result, SBP had to enhance its liquidity injections to align the inter-bank overnight repo rate with the policy rate, which led to an increase in reserve money growth.

The MPC noted that inflation was recorded at 3.2% in June 2025 against 3.5% in May owing to moderation in food inflation and a slight reduction in core inflation to 7.6%. Despite upward revisions in motor fuel prices and electricity tariffs, energy prices remained lower on a yearly basis.

The Committee was cautious of the rise in energy inflation amidst the upward adjustment in gas tariffs, phasing out of temporary reduction in electricity tariffs (of Q4-FY25) and recent increase in motor fuel prices. The inflation is expected to mostly remain in the range of 5-7 percent in FY26, though it may cross the upper bound in some months.

The MPC assessed and emphasized that this outlook is susceptible to multiple risks emanating from uncertain global commodity prices and trade outlook, unanticipated adjustments in administered energy prices, and potential widespread floods.