KARACHI: SBP Rate stayed at 11.5% after the Monetary Policy Committee (MPC) of the State Bank of Pakistan decided to leave the benchmark interest rate unchanged. The central bank said the current monetary policy remains suitable despite signs of economic recovery.

The committee said Pakistan’s economic outlook has improved since its previous review. However, it cautioned that renewed conflict in the Middle East, volatile commodity prices, and persistent inflation continue to pose risks. It said the current policy stance would help bring inflation within the medium-term target range of 5% to 7%.

Earlier improvements in regional stability helped reduce global oil prices and ease supply chain disruptions. Those developments supported lower inflation and stronger economic indicators. After reviewing these gains and emerging risks, SBP Rate remained unchanged.

Hormuz Tensions Deepen as Iran Holds Diplomatic Talks While Trump Signals Chance of Deal

Headline inflation fell to 11.1% in June from 11.7% in May. Core inflation also eased to 8.4%. Lower global energy prices and favorable electricity tariff adjustments drove the decline. However, higher prices for wheat and other perishable food items pushed food inflation higher.

The central bank also pointed to several encouraging developments. Pakistan’s foreign exchange reserves exceeded the $18 billion target at the end of June. Later debt repayments reduced reserves to about $17.3 billion by mid-July. Meanwhile, Standard & Poor’s upgraded Pakistan’s sovereign credit rating to “B”, reflecting stronger economic fundamentals.

The MPC said inflation expectations eased among consumers and businesses. It also noted that the Federal Board of Revenue successfully achieved its revised Rs13 trillion tax collection target for FY26.

Economic activity slowed during the final quarter of FY26. Higher energy prices, regional tensions, and government spending cuts affected growth. However, recent high-frequency indicators painted a more positive picture. Automobile sales, cement dispatches, fertilizer offtake, satellite data, and business confidence all pointed to a recovery in June.

The agriculture sector also showed signs of improvement. Higher expected sugarcane production could offset weaker cotton output. The central bank said stronger agricultural performance would support growth in related industries and services.

The MPC expects Pakistan’s economy to expand between 3.5% and 4.5% in FY27. However, policymakers warned that rising commodity prices, renewed Middle East tensions, and uncertain weather conditions linked to El Niño could slow economic growth.

The SBP expects the current account deficit to widen as economic activity gains momentum. Even so, it projects the deficit will remain between 0% and 1% of GDP during FY27. Workers’ remittances are expected to exceed last year’s $4.1 billion, helping finance a larger trade deficit. The central bank also aims to increase foreign exchange reserves to $20.2 billion by the end of December 2026 through official inflows and stronger private investment.

Fiscal performance also improved during FY26. The government recorded a primary budget surplus for the third consecutive year and reduced the overall fiscal deficit. It now targets a primary surplus of 2% of GDP and an overall fiscal deficit of 3.6% of GDP in FY27.

Banking sector indicators remained encouraging. Broad money growth slowed to 13.2%, while private-sector credit expanded 14.9% as financial conditions eased. Businesses increased borrowing for working capital and investment, while consumer financing also improved. The textile, telecommunications, wholesale, and retail sectors accounted for much of the credit growth.

Looking ahead, the SBP expects inflation to stay above its target range in the coming months because of higher global commodity prices, rising production costs, and domestic food prices. The central bank believes inflation will gradually ease and move closer to the upper end of its 5% to 7% target range by June 2027.