MPC says economy looks better, but warns about Middle East problems and high prices.
By Mahnoor | 28-07-2026
KARACHI: The State Bank of Pakistan’s Monetary Policy Committee has decided to keep the interest rate at 11.5%, even though they think the overall economy is doing better than before.
The committee said there are still big risks, especially due to new conflict in the Middle East, and they believe the current policy is still good to bring inflation down to 5-7% in the medium term.
Earlier, tensions in the region went down. This made global oil prices fall and supply chain problems ease a bit. So, recent economic signs got a little better. In June, both main and core inflation slowed, but they were still high. Short-term data showed more economic activity, while outside account pressures were moderate. Looking at these changes and risks, the MPC decided to keep things the same.
The committee pointed out some good news. SBP’s foreign exchange reserves passed the end-June 2026 target of $18 billion. This happened because of continued foreign currency buying and a small current account deficit in FY26, plus planned official money came in. Pakistan’s credit rating went up to “B” by Standard & Poor’s (S&P). After many big debt payments in recent weeks, reserves were about $17.3 billion by July 17.
In the latest surveys, people and businesses are less worried about inflation, but confidence indicators showed mixed results. The Federal Board of Revenue met its updated tax target for the 2025-26 year. Meanwhile, the International Monetary Fund raised its global inflation predictions for 2026 and 2027 in its latest World Economic Outlook because global commodity prices are higher.
The Monetary Policy Committee said economic activity slowed down in the last quarter of FY26 as expected, due to the Middle East conflict, higher global energy prices, and government spending cuts. However, some high-frequency data, like satellite images, car sales, cement shipments, fertilizer use, and business mood, suggest a slight recovery in June. The farming outlook has improved a bit, with early estimates pointing to a big increase in sugarcane output, which should more than make up for lower expected cotton production. Better conditions for commodity-making sectors are likely to help services as well.
The MPC expects the economy to grow by 3.5-4.5% in FY27. Risks from volatile global commodity prices due to Middle East tensions and uncertain weather, including El Niño effects, could hurt growth.
The current account deficit is expected to widen as economic activity picks up but will stay within 0 to 1% of GDP in FY27. Workers’ remittances are likely to be higher than last year’s $4.1 billion, helping to finance the larger trade deficit. With planned official inflows and some improvement in private flows, SBP’s foreign exchange reserves are targeted to reach $20.20 billion by end-December 2026.
The FBR met its revised tax collection goal of Rs13.0 trillion by the end of FY26. The primary balance stayed in surplus for the third year in a row, and the overall fiscal deficit was much lower than the previous year. Fiscal tightening is expected to continue in FY27, with a primary surplus target of 2% of GDP and an overall fiscal deficit target of 3.6% of GDP.
As of July 10, broad money (M2) growth slowed to 13.2% year-on-year from 15.2% at the last MPC meeting, due to lower contributions from both net domestic assets and net foreign assets of the banking system. Within net domestic assets, growth in net budgetary borrowing slowed, while private sector credit growth increased to 14.9%, helped by easier financial conditions. The rise in credit was broad across working capital, fixed investment, and consumer financing. Major borrowing sectors included textiles, telecommunications, and wholesale and retail trade. Reserve money growth also slowed, mainly due to the post-Eid drop in currency in circulation. Strong growth in bank deposits led to a fall in the currency-to-deposit ratio.
In June 2026, the overall inflation rate dropped to 11.1% compared to the same month last year, down from 11.7% in May. This was mainly because lower global energy prices were passed on to local consumers and because of a favorable change in electricity rates. Core inflation, which excludes volatile items, also slowed to 8.4% but is still high. Food inflation went up in June due to a big rise in the prices of wheat, related products, and key perishable items.
Looking ahead, recent increases in global commodity prices, higher input costs, and domestic food price pressures are likely to keep inflation above the target range for the next few months. After that, inflation is expected to slowly decrease and stabilize close to the upper end of the 5-7% target range by June 2027.
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