KARACHI: The State Bank of Pakistan (SBP) on Monday kept its policy interest rate unchanged at 11 per cent for the third consecutive meeting, warning that recent flooding could raise inflation and widen the current account deficit during FY26.
The Monetary Policy Committee (MPC) cited growing risks to the near-term macroeconomic outlook due to supply-side disruptions, particularly in the crop sector. While most market surveys had anticipated no change in the policy rate, the SBP’s statement placed greater emphasis on emerging inflationary pressures and external vulnerabilities stemming from the floods.
The central bank noted that inflation remained relatively moderate in July and August, with year-on-year inflation easing to 3pc in August from 4.1pc in July. Core inflation continued on a declining path, albeit at a slower pace. However, the MPC warned that a “temporary yet significant” supply shock from floods may push headline inflation above earlier projections in the second half of FY26.
The SBP said the economy is on a stronger footing compared to previous major flood events, supported by a stable policy rate, moderately growing demand, and a relatively benign global commodity price outlook. The real policy rate remains adequately positive, the MPC said, to keep inflation within the medium-term target range of 5-7pc, despite near-term volatility.
Warns of inflation and external risks from floods
Lowers growth outlook
While economic activity, as indicated by large-scale manufacturing and other high-frequency indicators, has shown momentum, the SBP revised down its growth projection. It now expects real GDP growth for FY26 to remain closer to the lower end of the previously estimated 3.25-4.25pc range due to flood-related disruptions.
The SBP said flood-induced crop damage could widen the trade deficit, though improved market access to the US may offer some relief. Overall, the current account deficit is expected to remain within the earlier projected range of 0–1pc of GDP in FY26.
In the first two months of FY26, the Federal Board of Revenue’s tax collection grew by 14.1pc year-on-year. The government also received Rs2.4tr in profit transfers from the SBP, along with higher petroleum levy receipts, which are expected to support a significant primary surplus in Q1FY26.
However, the MPC noted that the floods may lead to higher current expenditures and could slow revenue collection in the coming months.
Private sector credit
Private sector credit grew 14.1pc year-on-year, driven by improved financial conditions, easing inflation, and reduced government borrowing. Major borrowers included the textile, telecommunications, and wholesale and retail trade sectors.
The SBP expects credit demand to remain resilient despite risks from a potential slowdown in activity post-floods.
Uncertain inflation
While inflation has trended lower in recent months, the SBP cautioned that food inflation in particular may rise due to crop losses. The MPC expects inflation to exceed the upper bound of the 5–7pc target range during much of the second half of FY26, before easing back within range in FY27.
The outlook, the SBP said, is subject to risks including the evolving flood situation, international commodity price volatility, and possible adjustments in domestic energy tariffs.
Published in Dawn, September 16th, 2025
