The Monetary Policy Committee (MPC) of the State Bank of Pakistan on Monday decided to keep the policy rate unchanged at 11 percent, citing aligned inflation expectations and promising signs of economic recovery.

Despite this stabilization, the MPC voiced concerns over potential threats to the external sector and the implications of the fiscal year 2026″s budgetary measures on the trade deficit.

The decision arrives in a context where May saw inflation rates rise to 3.5 percent year-on-year, a figure anticipated by the MPC, while core inflation saw a slight decrease. The committee projects that inflation will continue to rise before stabilizing within the target range of 5-7 percent by FY26, influenced by earlier rate cuts and ongoing economic policies.

Economic growth is on a gradual incline, with real GDP growth for FY25 reported at 2.7 percent and an ambitious target of 4.2 percent set for the next year. This growth is supported by significant sectors such as industry and services, though the agriculture sector lagged due to reduced crop production. The MPC is optimistic about the continued growth driven by private sector credit expansion and investment in machinery and intermediate goods.

On the fiscal front, the primary balance showed a surplus of 2.2 percent of GDP in FY25, improving from 0.9 percent the previous year. The government aims to build on this with a targeted primary surplus of 2.4 percent for FY26. Challenges remain, however, with a notable reliance on domestic financing following a shortfall in expected external funds.

The external sector presents a mixed picture. Although the current account was nearly balanced in April, the cumulative outlook suggests a shift to a moderate deficit in FY26 due to strong import demands and other global economic pressures. The MPC highlighted the necessity for timely foreign inflows and fiscal consolidation to maintain macroeconomic stability.

In the realm of money and credit, growth in broad money supply slowed slightly, while private sector credit growth remained robust, buoyed by a favorable financial environment. Sector-specific growth was noted in textiles, telecommunications, and consumer finance.

The MPC reiterated its commitment to navigating the complex economic environment with a focus on stabilizing inflation and fostering sustainable economic growth through careful policy management and structural reforms. The upcoming period will be critical as the committee monitors evolving global and domestic challenges, aiming to adjust its strategies to ensure economic stability and growth.