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The State Bank of Pakistan decided to keep the policy rate unchanged at 11.5 per cent on Monday. The decision was made during a meeting for the final policy review of FY26. In a detailed statement, the MPC said that global oil prices had eased in light of recent geopolitical developments; however, it noted that the prices remained elevated compared to pre-conflict levels. Nonetheless, as anticipated in the last MPC meeting, the impact of the conflict is now reflecting in recent economic indicators, it said, noting that headline inflation rose to double digits in April and May, while core inflation also edged up. The statement continued: Moreover, economic activity is showing some signs of moderation, reflecting the impact of elevated prices, austerity measures and prevalent economic uncertainty. It added that the external account pressures remained moderate. As per the statement, the MPC observed that the macroeconomic outlook remained broadly unchanged since its previous meeting. In this context, the MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7pc over the medium term, the statement read. Key developments The statement outlined some key developments since the last meeting, including the GDP growth, which it said was provisionally estimated at 3.7pc by Pakistan Bureau of Statistics (PBS). Second, confidence of both consumers and businesses recovered marginally in the latest sentiment surveys, while their inflation expectations eased somewhat. Third, the successful completion of International Monetary Fund (IMF) reviews for Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF), coupled with ongoing purchases, increased SBPs FX reserves to 17.2 billion as of June 5, 2026, it continued. The statement also took note of the primary balance surplus, which was estimated to be at 2.5pc of GDP and was targeting a surplus of 2pc of GDP for FY27. It also took into account the impact of the Middle East war on macroeconomic conditions in many economies, which, as per the statement, led to several central banks raising their policy rates. Proactive management helped sustain macroeconomic stability According to the statement, it was observed that proactive macroeconomic management such as a forward-looking monetary policy and consistent fiscal consolidation had helped sustain macroeconomic stability amid the Middle East conflict. The MPC remains committed to achieving its objective of price stability and will closely monitor incoming data and evolving developments, the statement said. MPC also termed the acceleration of structural reforms as imperative for strengthening the economys resilience to supply shocks, enhance productivity, and create the necessary conditions for higher and more sustainable economic growth. In the real sector, the growth of GDP rose by 3.7pc in FY26, up from 3.2pc in FY25, reflecting the impact of the US-Iran war and the austerity measures, noting that the pre-conflict momentum was notably higher. The growth in FY26 was primarily underpinned by the services and industry sectors, with meaningful contribution from agriculture, it said, adding that large-scale manufacturing posted a growth of 6.5pc. In this context, the MPC said it expected that spillover from the conflict may continue to moderate activity in both industry and services sectors in the coming months. In the external sector, the MPC noted that reserve buildup is expected to continue amidst FX purchases and timely realisation of planned official inflows. For the fiscal sector, the MPC said that the fiscal consolidation remained broadly on track driven by expenditure restraint. In this regard, the MPC emphasised the importance of continuing with fiscal consolidation, the statement said, adding that the MPC also reiterated the need for timely implementation of structural reforms. On money and credit, the statement noted that since the last MPC meeting, the statement added that broad money (M2) growth moderated to 14.3pc y/y as of May 29 from 14.5pc on April 10. It continued: This was entirely due to a deceleration in NDA growth, reflecting moderation in net budgetary borrowing from the banking system. MPC noted that in the private sector, credit grew by 13pc, with an increase in working capital, fixed investment, and consumer financing. At the same time, the improvement in the external position led to an acceleration in NFA growth. On the liability side, growth in currency in circulation rose, partly reflecting seasonal Eid-related cash withdrawals, resulting in an increase in the currency-to-deposit ratio, it said. MPC also noted that headline inflation increased from 7.3pc in March to 10.9pc in April, followed by 11.7pc in May. Apart from the low base effect, the Middle East conflict has fueled inflation directly through the hike in domestic energy prices as well as indirectly through the rise in transportation and production costs, the statement said, noting that the production costs had also contributed to an increase in core inflation to 8.2pc in April and 8.7pc in May. It further stated that an unanticipated price hike in wheat and its products had raised food inflation in the past two months. MPCs assessment indicated a likelihood of double-digit inflation for the next few months, before gradually easing subsequently. This outlook is subject to multiple risks, including geopolitical developments, the extent of pass-through of global prices to domestic fuel prices, magnitude of adjustments in power and gas tariffs, potential fiscal slippages, and uncertain food prices amidst weather-related challenges, the statement concluded. In FY26, the only increase in the policy rate came in the previous review on April 27, when the SBP raised the benchmark rate by 100 basis points to 11.5pc. The increase was attributed to geopolitical tensions following the conflict in the Gulf, which pushed oil prices higher and disrupted global supply chains. However, as global oil prices have either remained stable or eased, the grounds for an increase in the policy rate largely disappeared, according to market participants. Analysts said developments over the past month have reduced concerns of a prolonged conflict in the Middle East, and supply chain conditions have also improved over the past month, according to market sources. Before deciding on rates, the MPC will likely assess several factors, including currency stability and the external account, said Faisal Mamsa, chief executive officer of Tresmark, ahead of the meeting. Sources in the financial sector had said that there was little likelihood of a further increase in the policy rate, while a reduction also appeared unlikely in the near term.

Source: Dawn News

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