SBP Maintains Key Interest Rate at 11% Amid Economic Considerations

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has elected to keep the benchmark interest rate steady at 11 percent. This decision reflects a mindful approach aimed at upholding price stability while fostering economic revitalization, against the backdrop of shifting macroeconomic indicators and potential risks.

The committee highlighted that the external economic landscape is susceptible to various risks. These risks are mainly fueled by intensifying geopolitical tensions, fluctuations in global oil prices, possible detrimental effects from proposed fiscal measures, and the chance of diminished anticipated financial inflows.

The MPC convened its meeting on Monday at the SBP headquarters, with Governor Jameel Ahmed presiding. During the session, the committee acknowledged that the rise in inflation to 3.5 percent year-over-year in May aligned with expectations, even as core inflation saw a slight decrease.

Concurrently, inflation expectations among both households and businesses have softened. Looking ahead, inflation is projected to rise and then stabilize within the target range during fiscal year 2026.

The committee also underscored that the timely receipt of planned foreign investments, the accomplishment of intended fiscal consolidation, and the execution of structural reforms are vital for preserving macroeconomic equilibrium and achieving sustainable economic advancement.

The MPC also observed that economic expansion is gradually gaining momentum and is anticipated to strengthen further in the coming fiscal year, bolstered by the continuing effects of earlier policy rate reductions. However, potential challenges to the external sector were noted, including a persistent increase in the trade deficit and weak financial inflows.

It was noted that certain fiscal year 2026 budgetary proposals might exacerbate the trade deficit by boosting imports. Consequently, the committee considered maintaining the current rate as suitable to support macroeconomic and price stability.

The Committee highlighted several key developments since its prior assembly. Initially, the real GDP growth for fiscal year 2025 is preliminarily reported at 2.7 percent, and the government is aiming for a higher growth rate of 4.2 percent for the upcoming year. Secondly, in spite of a substantial expansion in the trade deficit, the current account remained generally balanced in April. Moreover, the successful completion of the first Extended Fund Facility (EFF) review resulted in the allocation of approximately $1 billion, elevating the SBP’s foreign exchange reserves to $11.7 billion as of June 6.

Thirdly, revised budget projections suggest a primary balance surplus of 2.2 percent of GDP in fiscal year 2025, an increase from 0.9 percent the previous year. The government is targeting a higher primary surplus of 2.4 percent of GDP for the next fiscal year. Finally, global oil prices have significantly rebounded, influenced by the evolving geopolitical landscape in the Middle East and some easing of trade tensions between the U.S. and China.

Assessing these developments and potential risks, the MPC concluded that the real interest rate remains sufficiently positive to keep inflation within the target range of 5–7 percent.

As projected, headline inflation escalated to 3.5 percent year-over-year in May, up from 0.3 percent in April. This shift largely reflected the conclusion of favorable base effects from food prices, alongside the persistence of core inflation. Conversely, energy prices remained lower than the previous year, primarily due to the drop in global oil prices.

Furthermore, the MPC’s initial evaluation suggests that recent budgetary measures will have a limited effect on the inflation forecast. Nevertheless, some short-term instability in inflation is anticipated before it gradually rises and stabilizes within the 5-7 percent target range.

The committee acknowledged that this outlook remains vulnerable to various risks, stemming from potential supply-chain disruptions due to regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and extent of domestic energy price adjustments.

According to preliminary data, the economy picked up pace during the latter half of fiscal year 2025, with real GDP growth increasing to 3.9 percent from 1.4 percent in the first half of fiscal year 2025, broadly consistent with the MPC’s earlier forecasts, albeit with variations in composition.

The agricultural sector performed below expectations compared to fiscal year 2024, owing to a significant decrease in the production of major crops. Conversely, the industrial and services sectors contributed to the rise in real GDP growth, particularly in the second half of fiscal year 2025.

Looking forward, the MPC expects the industrial and services sectors to continue driving economic growth in fiscal year 2026. This assessment is backed by the sustained momentum in high-frequency indicators, including credit to the private sector, imports of machinery and intermediate goods, business sentiment, and easing financial conditions. Overall, the Committee anticipates further growth in real GDP during fiscal year 2026.

As per the monetary policy statement, the current account was nearly balanced in April 2025, bringing the cumulative surplus to $1.9 billion during July-April fiscal year 2025. Imports continued to rise in line with improved economic activity, while export growth slowed, partly due to the challenging global trade environment.

However, remittances from workers remained robust, more than offsetting the impact of the widening trade deficit on the current account. Based on these trends, the current account is projected to remain in surplus for fiscal year 2025.

Nevertheless, the uncertain global trade environment, combined with anticipated continued strong import demand, is expected to shift the current account into a moderate deficit in fiscal year 2026. The MPC also noted that despite net financial inflows remaining weak thus far, the SBP’s foreign exchange reserves are expected to increase to approximately $14 billion by the end of June 2025.

Moving forward, the external economic outlook is subject to numerous risks, primarily arising from heightened geopolitical tensions, volatility in international oil prices, potential adverse effects of proposed budgetary measures, and possible shortfalls in planned financial inflows.

On the fiscal front, revised budget estimates indicate further improvements in both the overall fiscal and primary balances during fiscal year 2025. This enhancement resulted from increased revenues and relatively controlled expenditures.