KARACHI: The State Bank on Monday kept the 11.5 per cent interest rate unchanged by a majority decision of 7 to 3, with the bank cautioning that uncertainty had increased due to the geopolitical environment.
The Monetary Policy Committee (MPC) said the interest rate was kept unchanged, as seven out of ten members supported the decision to maintain the policy rate. About 20 per cent of financial institutions had been expecting a 50-basis-point increase in the rate, which is also reflected in this split decision.
The committee said the recent intensification of the Mideast conflict had led to an increase in already elevated global commodity prices, while supply chain disruptions had also persisted due to the conflict and other factors.
However, recent domestic macroeconomic data turned out to be broadly in line with expectations, the MPC said, adding that headline inflation had increased to 11.1 per cent year-on-year in August from 9.2pc in July, while core inflation was slightly lower than expected. External account pressures remained contained, supported by robust workers’ remittances and higher financial inflows.
While noting some positive developments and evolving risks, the MPC reiterated its commitment to price stability, with close monitoring of incoming data and the ongoing situation in the Middle East. The committee said shocks, such as adverse geopolitical events and weather-related disruptions, had become more frequent and continued to pose risks to the macroeconomic outlook.
Against this backdrop, it stressed the need to maintain a prudent monetary and fiscal policy mix and to further build up buffers to absorb supply shocks.
“This, along with timely implementation of structural reforms, is essential to enhance resilience, raise productivity, and support higher and sustainable growth,” said the MPC.
Economic activity, after witnessing a slowdown in the last quarter of FY26, started to pick up gradually, and the MPC assessed that the current monetary policy stance remained appropriate to guide inflation towards the target range of 5-7 per cent over the medium term.
Inflation
Recent inflation has been driven largely by food prices in the wake of elevated prices of wheat and allied products, and perishable items. At the same time, intensification of the conflict in the Middle East has kept energy inflation at elevated levels. Increased fuel prices translated into higher transport costs, which pushed core inflation to 8.7 per cent. Inflation expectations of consumers and businesses also increased in the latest surveys.
“Inflation is expected to gradually ease towards the upper bound of the 5-7 per cent target range by June 2027, though the risks to the outlook have increased significantly,” said the MPC.
The key risks include volatility in global commodity prices, the magnitude of adjustments in electricity and gas tariffs, supply disruptions, and unexpected movements in food prices amid worsening El Niño conditions, it said.
Real sector
“High-frequency indicators — including POL sales, private sector credit, textile exports, business sentiment, and satellite imagery of both night-time lights and gas emissions — suggest a recovery in economic activity in July,” said the MPC. Furthermore, increased acreage for rice and sugarcane, along with encouraging initial reports on cotton arrivals, also improved prospects for the agriculture sector. The expected improvement in the commodity-producing sectors also bodes well for the outlook of the services sector.
“Against this backdrop, the MPC expects real GDP growth to remain within the earlier projected range of 3.5 to 4.5 per cent during FY27,” said the MPC.
The current account deficit in July was in line with the MPC’s expectations, as growth in imports of goods and services outpaced the increase in exports and robust workers’ remittances. The issuance of Eurobonds in September, along with significant FX purchases by the SBP, helped foreign exchange reserves increase to $21.4 billion. Going forward, resilient workers’ remittances and higher ICT exports are expected to contain the current account deficit within 0 to 1 per cent of GDP in FY27.
Fiscal sector
During FY26, fiscal consolidation turned out to be higher than the budgetary targets. This consolidation was led by contained current expenditures, especially lower interest payments. At the same time, the transfer of a significantly higher-than-budgeted SBP profit of Rs1.9 trillion has improved the fiscal outlook for FY27. The MPC re-emphasised the importance of picking up the pace of fiscal reforms.
Published in Dawn, September 15th, 2026
