SBP holds rate at 11% for fourth time

The State Bank of Pakistan (SBP) on Monday kept its benchmark policy rate unchanged at 11%, signalling cautious optimism about the economy's recovery trajectory. This marks the fourth consecutive Monetary Policy Committee (MPC) session in which the policy rate has been kept unchanged.

In its latest Monetary Policy Statement (MPS), the SBP's MPC noted that while economic momentum has strengthened, risks from volatile commodity prices, uncertain export prospects, and domestic food supply disruptions continue to weigh on the outlook.

The business community has been urging the central bank to reduce interest rates to make borrowing cheaper and stimulate growth in business activities.

"The decision is disheartening for industrial and commercial sectors and runs contrary to ongoing economic recovery efforts," said Muhammad Ikram Rajput, President of the Korangi Association of Trade and Industry (KATI). He noted that inflation had dropped to a manageable level of 5.6%, yet the SBP chose to maintain a high interest rate, a move he termed as anti-industry.

Headline inflation surged to 5.6% in September from 3% in August, primarily driven by flood-related food price increases and higher energy costs. Core inflation, however, remained steady at 7.3%. The central bank said inflation may temporarily exceed the target range of 5–7% before easing in FY27 but cautioned that the outlook remains sensitive to global oil price swings and domestic food market conditions.

Despite the inflation uptick, the SBP maintained a wait-and-see stance, citing the unfolding effects of earlier rate cuts and improving macroeconomic indicators. "The real policy rate remains adequately positive to stabilise inflation," the MPC said, stressing the need for coordination between fiscal and monetary policies to sustain stability.

Since the Pakistan Bureau of Statistics (PBS) revised FY25 GDP growth upward to 3% from 2.7%, the SBP now expects FY26 growth to reach the upper half of the earlier projected range of 3.25–4.25%.

Encouragingly, large-scale manufacturing (LSM) grew by 4.4% during July–August FY26, reversing last year's contraction. The central bank attributed this to higher sales of automobiles, cement, fertilisers, and petroleum products, alongside stronger credit demand and improving business sentiment.

In agriculture, losses from the recent floods appear "lower than initially feared," with major Kharif crops performing close to last year's levels. Satellite imagery also shows improved vegetation cover, raising hopes for a stronger Rabi season.

On the external front, the current account recorded a $110 million surplus in September, containing the deficit to $594 million for the first quarter of FY26.

The central bank projects reserves to reach $15.5 billion by December and $17.8 billion by June 2026, supported by planned inflows and resilient workers' remittances. However, the trade deficit is widening again as imports grow faster than exports amid economic recovery. The SBP warned that tariff shifts in key markets and global trade tensions pose risks to Pakistan's export growth.

Still, the MPC expects the current account deficit to remain modest - within 0–1% of GDP - if fiscal discipline is maintained and remittances continue to perform strongly.

Fiscal performance remained mixed in Q1-FY26. While tax revenues grew 12.5% year-on-year, the total collection of Rs2.9 trillion fell short of the quarterly target by Rs198 billion. The shortfall was partly offset by higher non-tax revenues, including substantial profit transfers from the SBP and petroleum levy receipts.

The SBP expects both the overall and primary balances to post surpluses in the first quarter. However, it underscored the need for continued fiscal restraint as post-flood rehabilitation spending picks up, warning that any fiscal slippage could undermine inflation control and external stability.

Monetary expansion slowed slightly, with M2 growth decelerating to 12.3% by mid-October, reflecting restrained government borrowing and slower credit to non-bank institutions. However, private sector credit (PSC) rose robustly by 17%, driven by higher working capital and investment demand - especially in textiles, telecom, chemicals, and retail trade.

Yet, rising currency in circulation, now making up nearly 38% of deposits, signals lingering informality and limited financial inclusion. The SBP noted that this keeps reserve money growth elevated, posing challenges to liquidity management.

While the central bank's tone reflected cautious confidence, it acknowledged that the recovery remains uneven and exposed to global headwinds. Pakistan's growth momentum, the MPC warned, depends critically on sustaining macroeconomic discipline, advancing structural reforms, and maintaining external and fiscal buffers to absorb future shocks.

Atif Ikram Sheikh, President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), strongly criticised the SBP's decision to maintain the policy rate at 11%, calling it "anti-growth" in light of the current economic conditions. Sheikh expressed deep concerns over the adverse impact of this decision on business sentiment and the broader economy.