SBP Maintains Policy Rate At 11% In Wake Of Evolving Post Flood Macroeconomic Outlook

The central bank’s Monetary Policy Committee (MPC), Monday, decided to keep the policy rate unchanged at 11 percent owing to the evolving macroeconomic outlook and potential impacts of the ongoing flood on the economy

KARACHI, (UrduPoint / Pakistan Point News - 15th Sep, 2025) The central bank’s Monetary Policy Committee (MPC), Monday, decided to keep the policy rate unchanged at 11 percent owing to the evolving macroeconomic outlook and potential impacts of the ongoing flood on the economy.

The MPC noted the declining trend in inflation and momentum of economic activity as captured by high frequency economic indicators including large-scale manufacturing (LSM) as well as slight deterioration to the near-term macroeconomic outlook in the wake of the ongoing floods and, as per the Monetary Policy Statement issued here by the State Bank of Pakistan, deemed the decision as appropriate to maintain price stability.

“This temporary yet significant flood-induced supply shock, particularly to the crop sector, may push up headline inflation and the current account deficit from earlier expectations in FY26. Meanwhile, economic growth is projected to moderate as compared to the previous assessment,” the committee cautioned.

Viz a Viz, the economy is on a significantly stronger footing to withstand the negative fallout of the ongoing floods as compared to previous major flood events, the MPC observed, noting that the excessive inflationary and external account pressures witnessed after the previous floods, are projected to remain in check this time due to low inflation environment, moderately growing domestic demand and relatively benign global commodity price outlook along with the build-up in external and fiscal buffers over the past two years.

The committee stressed on the need of continuing the coordinated and prudent monetary and fiscal policy mix to make the economy more resilient to shocks and ensure higher growth on a sustainable basis.

The Committee took a view of key developments since its last meeting including stable SBP FX reserves, rise in inflation expectations of both consumers and businesses in September in the SBP-IBA sentiment surveys, significant growth in the FBR tax collection during July-August 2025 though falling slightly short of target and reduction in global trade uncertainty after US revised import tariffs.

The MPC, in view of these developments and outlook, assessed that the real policy rate remains adequately positive to stabilize inflation within the medium-term target range of 5-7%, notwithstanding some expected short-term volatility in inflation outturns.

The Committee noted that in the Real Sector incoming data of high-frequency indicators continue to point toward strong underlying economic momentum from H2-FY25 onwards while LSM registered 3% growth in Q4-FY25, however, the recent floods have moderated the overall growth outlook for FY26.

“Based on the currently available information, including satellite imagery, Kharif crops have incurred losses. These losses, together with flood-related supply chain disruptions, may also dampen activity in the manufacturing and services sectors in the near term,” the MPC observed but it was also optimist at the same time about the prospects for Rabi crops those have somewhat improved in the wake of a likely increase in post-flood yields.

The MPC assessed that real GDP growth for FY26 to remain close to the lower end of the earlier projected range of 3.25 to 4.25%.

The committee reviewed the import-led current account deficit of $254 million in July 2025, amidst a pickup in economic activity and some moderation in remittances while SBP’s FX reserves remained stable around $14.3 billion as of September 5, but the external sector outlook remains susceptible to evolving domestic and global conditions, particular crop damages.

Pakistan’s improved market access to the US is likely to partly offset those impacts while resilient remittances may pick up further as experienced during previous episodes of natural disasters, MPC noted asserting that “On balance, the current account deficit is likely to remain in the earlier projected range of 0 to 1 percent of GDP in FY26.

With the expected realization of planned official inflows, SBP’s FX reserves to reach around $15.5 billion by December 2025, the committee further projected adding that growth in FBR tax collection and the transfer of sizeable budgeted profit of Rs2.4 trillion from SBP to the government and higher petroleum levy are expected to lead to a significant primary surplus in Q1-FY26.

However, the MPC was also cautious of floods related increase in current expenditures, besides some potential slowdown in revenue collection and reiterated the need to continue reforms, preferably through broadening the tax base and reforming loss-making SOEs, to create additional space for social and development spending, and to further build buffers to cushion the impact of future economic shocks.

The Committee reviewed the broad money (M2) growth with some changes in its composition while deposits remained the main driver of M2 growth and currency in circulation saw a seasonal decline. Meanwhile, with the receipt of SBP profit, the net budgetary borrowing from the banking system declined sharply, while banks’ credit to the non-government sector increased.

PSC growth accelerated to 14.1 percent y/y, supported by easing financial conditions, improving economic activity and continued decline in budgetary borrowing, the MPC noted, adding that the expansion in credit was broad based, with increases recorded in working capital loans, fixed investment advances and consumer financing and textiles, telecommunications, and wholesale and retail trade were included in the key borrowing sectors.

Inflation outturns largely reflected volatility in food and energy prices, whereas core inflation remained on downward trajectory, albeit at a slower pace, the MPC observed and noted that the recent floods have increased uncertainty related to the near-term inflation outlook, particularly for food inflation.

Reviewing increase in prices of perishables and wheat and allied products and recent favourable adjustments in electricity tariffs, the Committee assessed that inflation may cross the upper bound of the target range of 5 to 7% for most of the second half of FY26, before reverting to the target range in FY27.