THE State Bank’s decision to keep its key policy rate unchanged at 11pc, for the third time in a row, signals its concerns over the evolving risks to the inflation and growth outlook as the country continues to reel under the impact of the floods. This is despite the SBP’s confidence in the ability of the economy to weather the flood-related destruction in Punjab — our largest agricultural producer — and beyond. The decision is shaped mainly by a need to balance the near-term potential rise in food inflation — as indicated by the surging weekly price indicators — and import demand amid what the bank calls a slight deterioration in the macroeconomic outlook, while also focusing on the medium-term need to stabilise expectations and preserve hard-won stability. With floods threatening Kharif crop yields, food prices and the current account balance, the immediate outlook is clouded. Therefore, the bank believes that inflation may breach the 5-7pc target for much of the present year, while growth may ease to the lower band of its previous forecast of 3.25-4.25pc range.

Yet the bank feels that these shocks, while significant, will not overwhelm the national economy, which stands on a “stronger footing to withstand the negative fallout of the ongoing floods as compared to previous major flood events”. Its confidence stems from a number of positive developments. Headline consumer inflation has significantly moderated and core inflation is trending down — albeit slowly. Official international reserves have surged to $14.3bn, despite debt repayments and the current account deficit, and are expected to reach $15.5bn by the end of 2025. Besides, remittances remain robust. On the fiscal side, the growth in FBR tax collection, which fell slightly short of the target during July-August, is expected to lead to a significant primary surplus in Q1-FY26 with the help of SBP profits. Moreover, global trade uncertainty has reduced following the announcement of revised US import tariffs, while commodity price outlook remains benign. Nonetheless, the bigger challenge lies ahead if fiscal pressures mount due to reconstruction spending and potential slowdown in revenues. In this situation, the SBP is right to emphasise the continuation of reforms — preferably related to tax and state-owned enterprises — and a prudent monetary and fiscal policy mix to create space for additional development spending and strengthen external and fiscal buffers to cushion the impact of future economic shocks.

Published in Dawn, September 17th, 2025