Pakistan’s central bank has kept the policy rate unchanged at 11 percent, signaling a cautious stance amid a changing inflation outlook. In its meeting on July 30, 2025, the Monetary Policy Committee (MPC) noted a drop in headline inflation to 3.2 percent in June, mainly due to lower food prices. Core inflation also edged down. But the Committee warned that a steeper-than-expected hike in gas tariffs could put renewed pressure on prices in the months ahead.
Still, the central bank expects inflation to remain within the 5 to 7 percent target range going forward. Meanwhile, signs of economic recovery are becoming more visible, supported by earlier rate cuts. However, with the trade deficit expected to widen in FY26, the MPC considered the current stance necessary to anchor inflation expectations and preserve macroeconomic stability.
Key Economic Trends Since Last Meeting
The MPC highlighted several developments that shaped its decision. Foreign exchange reserves rose above $14 billion due to improved inflows and a current account surplus. Pakistan’s sovereign credit rating also received an upgrade, which reduced Eurobond yields and narrowed CDS spreads.
Sentiment surveys showed mixed results: inflation expectations increased slightly for consumers but eased for businesses. On the fiscal side, the FBR collected Rs11.7 trillion in FY25, just shy of the revised target. Global commodity trends remained volatile, especially oil and metals, while uncertainty around global trade policies kept most central banks in a wait-and-see mode.
Real Interest Rate Still Supportive
The Committee emphasized the need to keep the real interest rate positive to help steer inflation toward the target range. It urged the continuation of prudent monetary and fiscal policies, adding that without meaningful structural reforms, Pakistan’s long-term growth potential would remain limited.
Economic Recovery Gains Momentum
Recent data reflects a gradual economic rebound. High-frequency indicators, including car sales, fertilizer offtake, private sector credit, and machinery imports, all showed year-on-year gains. Large-scale manufacturing (LSM) also returned to positive territory in April and May after months of contraction.
Agriculture is expected to bounce back in FY26, aided by recent rainfall and improved water availability. Stronger performance in the commodity-producing sectors is likely to lift the services sector as well. With business sentiment improving and financing conditions easing, real GDP growth is projected to rise to between 3.25 and 4.25 percent in FY26, up from 2.7 percent in FY25.
External Position Remains Stable
Pakistan posted a $328 million current account surplus in June, taking the full-year FY25 total to $2.1 billion—or 0.5 percent of GDP. Remittances played a key role in offsetting the widening trade gap.
The SBP expects workers’ remittances to grow more slowly in FY26 due to a high base and changes in incentive schemes. Meanwhile, imports are expected to rise as domestic activity picks up, while exports may face headwinds from weak global demand and lower rice prices. As a result, the current account may shift into a deficit of up to 1 percent of GDP. However, higher expected private inflows following the rating upgrade could boost FX reserves to $15.5 billion by end-December.
Read: SBP Surprises Markets by Holding Policy Rate at 11%
Fiscal Position Improves, But Challenges Remain
Government figures show improvement in both the primary and overall fiscal balances for FY25. Growth in tax and non-tax revenues helped, although the FBR narrowly missed its revised target despite strong 26 percent growth.
For FY26, the government aims for a primary surplus of 2.4 percent of GDP. Meeting this target will require continued revenue collection efforts and tighter control on spending. The MPC called for sustained fiscal discipline to protect the macroeconomic progress made in recent years.
Broad Money and Credit Expand
Broad money (M2) growth rose to 14 percent year-on-year by mid-July, up from 12.6 percent at the last review. This was largely due to an increase in net foreign assets linked to stronger FX reserves.
Private sector credit expanded 12.8 percent year-on-year, driven by better financial conditions and rising economic activity. Loans for working capital, fixed investment, and consumer finance all grew. Key borrowing sectors included textiles, telecom, and wholesale trade. Liquidity injections by the SBP also increased in July as currency in circulation rose, boosting reserve money growth.
Inflation Outlook and Risks
Headline inflation slowed to 3.2 percent in June, down from 3.5 percent in May. Food prices eased, and core inflation dipped slightly to 7.6 percent. Although fuel and electricity tariffs were revised upward, energy prices remained lower on a year-on-year basis.
Looking ahead, the MPC expects inflation to mostly stay within the 5 to 7 percent range. However, some months could see readings above the upper bound due to energy price adjustments, fading temporary subsidies, and global uncertainty. Risks from commodity prices, trade tensions, and possible flooding remain.
Path Ahead
The central bank signaled confidence in the ongoing recovery but remained alert to risks. A steady hand on policy, combined with reforms and fiscal discipline, will be key to maintaining momentum while keeping inflation under control
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