The State Bank of Pakistan (SBP) on Monday decided to maintain the benchmark interest rate at 11 per cent, as the Monetary Policy Committee (MPC) assessed that economic recovery is gradually gaining momentum, while inflation expectations have moderated.

In its policy statement, the SBP noted that the recent uptick in inflation — with headline inflation rising to 3.5 per cent year-on-year in May — was broadly in line with projections. Meanwhile, core inflation eased slightly and inflation expectations among businesses and households declined.

“The Committee expects inflation to inch up in the near term before stabilising within the target range of 5–7pc during FY26,” the central bank said.

While acknowledging the strengthening domestic economic activity, the MPC also flagged potential risks to the external sector, particularly due to the persistent widening of the trade deficit and subdued financial inflows.

It warned that some measures in the upcoming FY26 budget might increase import demand, which could exert additional pressure on the external account.

Growth outlook improving

According to provisional estimates by the Pakistan Bureau of Statistics (PBS), real GDP growth for FY25 stood at 2.7pc, with a notable acceleration in the second half of the fiscal year. The government is targeting a higher growth rate of 4.2pc for FY26.

“Growth has been led by improvements in the industrial and services sectors, while agriculture performance remained weak due to lower major crop production,” the SBP said.

The Committee also pointed to improving high-frequency indicators — such as increased credit to the private sector and higher imports of machinery and intermediate goods — as evidence of sustained economic momentum.

External account stable but vulnerable

Despite a widening trade deficit, the current account remained nearly balanced in April, taking the cumulative surplus to $1.9 billion during July-April FY25, largely supported by robust workers’ remittances.

However, the SBP cautioned that the external outlook remains fragile, citing global trade headwinds, volatility in oil prices due to Middle East tensions, and possible delays in planned financial inflows.

“While FX reserves rose to $11.7bn as of June 6 following the disbursement of $1bn under the first EFF review, reserves are projected to increase to around $14bn by end-June 2025,” the statement said.

Fiscal performance improves

The revised fiscal estimates for FY25 show an improved primary surplus of 2.2pc of GDP, up from 0.9pc a year earlier. For FY26, the government has set an ambitious target of 2.4pc.

The MPC underscored the importance of timely reforms — including broadening the tax base and restructuring public sector enterprises — to achieve sustained fiscal consolidation.

Credit expansion and inflation outlook

Private sector credit grew by around 11pc as of May 30, led by strong demand in the textile, telecom, and wholesale and retail sectors. Consumer finance also picked up significantly amid easing financial conditions.

Reserve money growth rose sharply, mainly due to seasonal currency demand around Eid, prompting the SBP to inject liquidity to stabilise short-term rates.

Regarding inflation, the Committee said the increase in May reflected a fading favourable base effect and persistent core inflation, though global energy prices remained low.

“The impact of budgetary measures on inflation is expected to be limited,” the MPC said, adding that while some volatility is likely in the near term, the outlook remains within the 5–7pc target.