Pakistan surprises by holding key rate steady to stabilise inflation

KARACHI: Pakistan's central bank left its key interest rate unchanged at 11% on Wednesday, saying the outlook for inflation had deteriorated due to energy prices, surprising analysts who had expected another cut.

The Monetary Policy Committee of the State Bank of Pakistan said in a statement that energy prices, particularly for gas, had risen more than expected.

The panel also noted that the trade deficit was expected to widen further in the fiscal year ending June 2026, amid a pickup in economic activity and a slowdown in global trade.

"The inflation outlook has somewhat worsened," it said. "Given this macroeconomic outlook and the emerging risks, the MPC considered today's decision as necessary to ensure price stability."

In a Reuters poll this week, all 15 analysts said they expected the SBP to ease, with nine forecasting a 50 basis-point cut, four predicting a deeper 100 basis-point reduction and two projecting a smaller 25 basis-point cut.

"You have to be cautious," State Bank Governor Jameel Ahmad, told a news conference in Karachi, after announcing the policy rate, saying it is better to wait than to take action and then have to reverse it.

Pakistan is pushing through a series of economic reforms under a $7 billion International Monetary Fund programme, including a contractionary government budget passed in June that slashes spending to curb its fiscal deficit.

In its Economic Outlook Update on Tuesday, the IMF cut its growth forecast for Pakistan for the fiscal year ending June 2026 to 3.6%, well below the government's 4.2% target.

The Committee assessed that the real policy rate should be adequately positive to stabilise inflation in the target range of 5%-7%, the statement said.

Headline inflation slowed to 3.2% in June and is projected at 3.5%-4.5% in July, within the SBP's 5.5%-7.5% target range for the fiscal year ending June 2026.

The State Bank took a cautious stance given the fragile situation of the currency and the balance of payments, said Adnan Sheikh of Pakistan Kuwait Investment Company, a Pakistani development financial institution.

"It opted to wait and see the impact of recent monetary easing, and the crop situation given the flooding," he said, referring to heavy monsoon rains across the country this month.

The SBP held rates in June after a 100 basis-point cut in May. Since June 2024, it has lowered its policy rate by 1,100 basis points from a record 22% as price pressures receded.

The government says the economy has stabilised, but analysts warn growth remains fragile and global commodity price swings could still add pressure on prices and external balances.

GDP is projected to grow between 3.25% and 4.25% this year, the governor said.

"We have to grow at a pace which we can maintain," he said.

Pakistan’s finance ministry on Monday projected consumer inflation for July to remain in a 3.5-4.5% range, citing stable prices and improved supply conditions, as price pressures ease further after the previous fiscal year’s sharp decline.

Inflation stood at 3.2% in June, the ministry said in its monthly economic report, while average inflation for the fiscal year ending June 30 dropped to 4.49%, a nine-year low, from 23.4% the year before. Pakistan’s fiscal year begins on July 1.

The ministry said the economy is expected to sustain its recovery in the early months of fiscal year 2026, underpinned by an improved macroeconomic backdrop and growing investor confidence.

Large-scale manufacturing likely maintained momentum in June, supported by rising private sector credit offtake and expanding production activity, the report said. The rebound is expected to lift imports of raw materials and intermediate goods, while aiding value-added exports, it added.

Strengthening domestic demand, a stable exchange rate, and steady global commodity prices were also likely to boost exports, remittances and imports in July, reinforcing external sector stability, the ministry said.

However, it warned that recent heavy rains could pose risks to agricultural output and supply chains, potentially impacting the inflation outlook in the coming months.

Since June  26, rain- and flood-related incidents have killed at least 266 people and injured more than 630 nationwide, according to the National Disaster Management Authority, adding that 1,557 houses had been destroyed.

Earlier, Pakistan’s economy recorded a growth rate of 2.7% during the fiscal year 2024-25, exceeding earlier projections, according to the latest report issued by the Asian Development Bank (ADB), titled Asian Development Outlook — July 2025.

Agencies