The State Bank of Pakistan’s Monetary Policy Committee (MPC) issued its Monetary Policy Statement on September 15, 2025, and decided to keep the policy rate unchanged at 11 percent. The committee noted that headline inflation stayed moderate in July and August, while core inflation continued to decline at a slower pace.
High-frequency economic indicators, including large-scale manufacturing (LSM), showed further momentum in economic activity. However, the MPC warned that the near-term macroeconomic outlook has slightly deteriorated due to widespread floods. This supply shock, particularly in the crop sector, may push up headline inflation and widen the current account deficit in FY26.
Floods Shape Near-Term Economic Outlook
The MPC stated that the ongoing floods have temporarily increased uncertainty. It projected a moderation in economic growth compared to its previous assessment, but stressed that Pakistan’s economy is better prepared than in previous flood episodes.
According to the Monetary Policy Statement, low inflation, moderate domestic demand, and a benign global commodity price outlook should keep inflationary and external pressures under control. The committee emphasized that continued build-up of external and fiscal buffers, achieved through a prudent policy mix over the last two years, will help sustain higher and more resilient growth.
Key Developments Since the Last Meeting
The MPC highlighted several developments since its previous session. SBP’s foreign exchange reserves remained stable at around $14.3 billion despite net debt repayments and a current account deficit. Inflation expectations of consumers and businesses rose slightly in September, according to SBP-IBA sentiment surveys.
At the same time, Federal Board of Revenue (FBR) tax collection fell marginally short of target in July-August 2025, though it recorded significant year-on-year growth. The revised US import tariffs also reduced global trade uncertainty, offering a potential boost for Pakistan’s exports.
The MPC concluded that the real policy rate remains adequately positive to anchor inflation within the medium-term target range of 5 to 7 percent, despite expected short-term volatility.
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Real Sector Gains Offset by Flood Losses
Data from high-frequency indicators — such as machinery imports, auto and cement sales, private sector credit, and business confidence — showed strong underlying economic momentum from H2-FY25 onwards. LSM grew by 3 percent year-on-year in Q4-FY25 after contracting for three quarters.
However, the floods damaged Kharif crops and disrupted supply chains, which may dampen manufacturing and services activity in the near term. Rabi crop prospects have improved due to expected higher post-flood yields. Taking these factors into account, real GDP growth for FY26 is now projected near the lower end of the earlier 3.25 to 4.25 percent range.
External Sector and Reserves Outlook
The current account posted a deficit of $254 million in July 2025 due to increased imports amid rising activity and moderated remittances. Despite weak financial inflows, SBP reserves stayed stable. The Monetary Policy Statement noted that flood-related crop losses may widen the trade deficit but improved US market access could offset part of this impact.
Remittances remain resilient and may rise further as seen during previous natural disasters. On balance, the current account deficit is projected to stay within the 0 to 1 percent of GDP range in FY26. With planned official inflows, SBP reserves are expected to reach $15.5 billion by December 2025.
Fiscal and Credit Conditions
FBR’s tax collection grew 14.1 percent year-on-year in the first two months of FY26. Transfers of Rs2.4 trillion SBP profit and higher petroleum levies are expected to generate a significant primary surplus in Q1-FY26. However, the MPC warned that floods may increase expenditures and slow revenue collection. It called for continued reforms to broaden the tax base and restructure loss-making SOEs to free resources for social and development spending.
Broad money (M2) growth decelerated to 13.9 percent year-on-year as of August 29. Deposits drove the growth, while currency in circulation declined seasonally. Private sector credit accelerated to 14.1 percent year-on-year, with increases in working capital loans, fixed investment advances, and consumer financing. Textiles, telecommunications, and wholesale and retail trade were the main borrowing sectors.
Inflation Outlook and Risks
Inflation rose to 4.1 percent year-on-year in July before dropping to 3 percent in August. Food and energy price volatility drove these movements, while core inflation kept declining. The MPC cautioned that flood-related supply shocks may push food prices higher. Weekly SPI already shows significant increases in perishables and wheat products.
Some upward pressure may be offset by favorable adjustments in electricity tariffs. Nonetheless, inflation is likely to exceed the 5 to 7 percent target for most of the second half of FY26 before returning to the range in FY27. Risks stem from evolving flood conditions, global commodity prices, and potential energy price adjustments.
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