KARACHI: The State Bank of Pakistan (SBP) released its first Monetary Policy Report (MPR), explaining the reasons which the Monetary Policy Committee kept in consideration and decided to maintain the base rate at 11% despite visible improvement in macroeconomic indicators.
“The Committee acknowledged the recent improvement in macroeconomic dynamics, but also considered potential domestic and global risks to the macroeconomic outlook. These include volatile international commodity prices, global trade uncertainty, and unanticipated adjustments in domestic administered energy prices,” the Monetary Policy Report stated.
The Report, according to a SBP statement issued here, is part of its continuous communications efforts to increase transparency in monetary policy making and in more effectively communicating the considerations for policy formulation to relevant stakeholders.
With the policy rate kept unchanged at 11 percent in the MPC meetings in June and July, the MPC expected the real policy rate to be adequately positive to stabilize inflation within the medium-term target range.
However, in the external account, the trade deficit might widen further and result in a current account deficit of 0-1 percent of GDP while real GDP growth to range between 3.25-4.25% in FY26, it added.
Nonetheless, the MPR observed that the projected financial inflows, coupled with continued SBP inter-bank FX purchases, would support further buildup in SBP’s FX reserves, which are projected to rise to $15.5 billion by end-December 2025. Meanwhile, economic activity is projected to gain further traction, with the impact of the earlier reductions in the policy rate still unfolding.
The MPR noted that the economic activity continued to pick up gradually, with real GDP growth for the full fiscal year 2024-25 rising to 2.7% without creating excessive inflationary and external account pressures while SBP-IBA business sentiment surveys indicate signs of a gradual revival in economic and investment activity.
The MPR, while discussing potential external and domestic risks to the baseline macroeconomic outlook, observed that the global economic environment continues to remain challenging amid elevated trade uncertainty and commodity prices remain volatile and these factors may affect Pakistan’s inflation and balance of payment outlook.
On the external front the Report observed a key risk stemming from heightened global economic uncertainty, particularly triggered by recent trade-related tariff developments, while potential volatility in global commodity prices, particularly of energy and food products, poses risks to the outlook for the external account and domestic inflation.
On the domestic front, the MPR is cautious of recent heavy rainfalls and flooding in some parts of the country which pose near term risks to the inflation outlook, primarily through an increase in prices of perishable food items.
Beyond these immediate risks, tight global financial conditions and unanticipated timing and magnitude of adjustments in administered energy prices have implications for the outlook of both inflation and overall economic activity, the MPR stated and stressed on sustaining the prudent monetary and fiscal policy stance, and undertaking wide-ranging structural reforms.
The MPR also contains five box items that discuss both important theoretical underpinnings related to monetary policy formulation and communication, as well as topical issues at the global and domestic levels.
