Status quo: MPC keeps policy rate unchanged at 11%

In line with market expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided on Monday to keep the policy rate unchanged at 11%.

“At its meeting today, the MPC decided to keep the policy rate unchanged at 11%,” the MPC said in a statement.

The MPC noted that the increase in inflation in May to 3.5% year-on-year (y/y) was in line with its expectation, whereas core inflation declined marginally.

“Going forward, inflation is expected to trend up and stabilise in the target range during FY26,” it said.

The MPC also assessed that economic growth was picking up gradually and was projected to gain further traction next year, supported by the still-unfolding impact of earlier policy rate cuts.

“At the same time, the committee noted some potential risks to the external sector amidst the sustained widening in the trade deficit and weak financial inflows. Moreover, some of the proposed FY26 budgetary measures may further widen the trade deficit by increasing imports. In this regard, the committee deemed today’s decision appropriate to sustain the macroeconomic and price stability,” read the statement.

Since its last meeting, the MPC noted the following key developments.

“First, the real GDP growth for FY25 is provisionally reported at 2.7%, and the government is targeting higher growth of 4.2% for next year.

“Second, despite a substantial widening in the trade deficit, the current account remained broadly balanced in April.

“Meanwhile, the completion of the first EFF review led to the disbursement of around $1 billion, which increased the SBP’s FX reserves to $11.7 billion as of June 6.

“Third, the revised budget estimates indicate the primary balance surplus at 2.2% percent of GDP in FY25, up from 0.9% percent last year. For next year, the government is targeting a higher primary surplus of 2.4% of GDP.

“Lastly, global oil prices have rebounded sharply, reflecting the evolving geopolitical situation in the Middle East and some ease in US-China trade tensions,” read the statement.

The MPC assessed that the real interest rate remains adequately positive to stabilise inflation within the target range of 5 – 7%.

“Furthermore, the Committee emphasised the timely realisation of planned foreign inflows, achievement of the targeted fiscal consolidation and the implementation of structural reforms as essential to maintain macroeconomic stability and achieve sustainable economic growth,” it noted.

Inflation expectations

The MPC said that its initial assessment indicates the recent budgetary measures to have a limited impact on the inflation outlook.

“Nonetheless, some near-term volatility in inflation is expected, before it gradually inches up and stabilises within the 5 – 7% target range.

“This outlook, however, remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments.”

Market expectations

Market experts had widely expected the central bank to hold the key policy rate at 11%.

“While domestic macroeconomic indicators have improved significantly, particularly inflation and the external account, we believe the central bank is likely to adopt a wait-and-see approach in light of emerging global risks and domestic policy adjustments,” Arif Habib Limited (AHL), a brokerage house, had said earlier in a report.

AHL, in its report, was of the view that while the domestic landscape supports an easing bias, recent geopolitical developments raised the stakes.

“Escalating tensions in key oil-producing regions have triggered a sharp surge in global oil prices. Benchmark crude contracts, including Brent, WTI, and Arab Light, have risen close to 10-12% WoW, with daily spikes exceeding 6% as of the latest reading.

“For an oil-importing economy like Pakistan, this poses direct and indirect inflationary risks,” AHL had noted.

Analysts at Topline Securities had also believed that the central bank’s MPC would observe a status quo as international crude oil prices had rebounded to US$68-70/barrel amidst rising tensions in the Middle East region and an expected US-China deal.

“This warrants a cautious approach from policy makers, in our view, as oil prices’ movement has remained a major driver of inflation in past.

“Some of the major notifications are also expected before the start of next fiscal year, i.e. gas price notification, and electricity price notification, among others,” Topline said in its report then.

Similarly, a Reuters poll had found that the SBP would hold its key interest rate at 11% due to geopolitical tension, as analysts cited inflation risks from rising global commodity prices.

“There remains an upside risk of a rise in global commodity prices in light of geopolitical tensions, which could mark a return to inflationary pressures,” Ahmad Mobeen, senior economist at S&P Global Market Intelligence had said.

Previous MPC meeting

In its last meeting, the MPC of the central bank cut the policy rate by 100 bps to 11%, contrary to market expectations.

The committee, at that time, noted that inflation declined sharply during March and April, mainly due to a reduction in administered electricity prices and a continued downward trend in food inflation.

“Core inflation also declined in April, primarily reflecting favourable base effects amidst moderate demand conditions.

“Overall, the MPC assessed that the inflation outlook has improved further relative to the previous assessment,” read the statement.

Since the last MPC meeting, several key economic developments have occurred.

The rupee has depreciated by 0.6%, while petrol prices increased by 2.3%.

Internationally, oil prices significantly jumped by over 25% since the last MPC, hovering around $72 per barrel amid heightened regional tensions.

Pakistan’s headline inflation clocked in at 3.5% on a year-on-year basis in May 2025, a reading higher than that of April 2025, when it stood at 0.3%, showed Pakistan Bureau of Statistics (PBS) data.

In addition, Pakistan’s current account (C/A) posted a slight surplus of $12 million in April 2025, against a massive surplus of $1.2 billion (revised) last month, data released by the central bank showed. On a year-on-year (YoY) basis, the C/A decreased 96% against a surplus of $315 million (revised) recorded in the same month last year.

Foreign exchange reserves held by the SBP increased by $167 million on a weekly basis, clocking in at $11.68 billion as of June 6.

Total liquid foreign reserves held by the country stood at $16.88 billion. Net foreign reserves held by commercial banks stood at $5.12 billion.