• Keeps key policy rate unchanged at 11.5pc
• Inflation may remain in double digits for next few months
• Growth outlook faces risks from Middle East crisis, weather challenges
• Reserve accumulation expected to continue despite wider current account deficit

KARACHI: The State Bank of Pakistan (SBP) on Monday kept its key policy rate unchanged at 11.5 per cent, citing a sharp rise in inflation, an uptick in core inflation and elevated oil prices compared to pre-conflict levels.

The decision was largely in line with market expectations, as most analysts believed the prevailing economic conditions were not conducive to a change in the interest rate.

Announcing the decision, the SBP’s Monetary Policy Committee (MPC) said the impact of the Middle East conflict was now becoming evident in recent economic indicators.

Economic activity is showing signs of moderation, reflecting the effects of elevated prices, austerity measures and prevailing economic uncertainty, the MPC said, adding that external account pressures remained manageable.

While assessing the impact of these developments and associated risks, the committee noted that the macroeconomic outlook remained broadly unchanged from its previous meeting.

The MPC highlighted that the Pakistan Bureau of Statistics had estimated GDP growth at 3.7pc for the fiscal year 2025-26, business confidence had improved marginally, the IMF programme reviews had been completed successfully, and the SBP’s purchases of dollars from the banking market had helped raise foreign exchange reserves to $17.2 billion.

The central bank said headline inflation rose sharply from 7.3pc in March to 10.9pc year-on-year in April and 11.7pc in May.

Apart from the low base effect, the Middle East conflict has fuelled inflation directly through increases in domestic energy prices and indirectly through higher transportation and production costs, the MPC statement said.

The latter contributed to an increase in core inflation, which rose to 8.2pc in April and 8.7pc in May. In addition, an unexpected surge in wheat and wheat-product prices significantly pushed up food inflation over the last two months.

Inflation may remain in double digits for the next few months before gradually easing thereafter, the MPC said.

“This outlook is subject to multiple risks, including geopolitical developments, the extent of pass-through of global prices to domestic fuel prices, the magnitude of adjustments in power and gas tariffs, potential fiscal slippages, and uncertain food prices amid weather-related challenges,” it added.

Real, external sectors

The MPC pointed out that real GDP grew by 3.7pc in FY26, up from 3.2pc in FY25, despite the impact of the Middle East conflict and austerity measures. Looking ahead, the committee expected spillover effects from the conflict to continue moderating activity in both the industrial and services sectors in the coming months.

“This, along with subdued agricultural prospects — as indicated by initial information on Kharif crops amid challenging weather conditions — may weigh on the growth outlook for FY27,” the MPC said.

The current account recorded a deficit of $0.3bn in April, resulting in a cumulative deficit of $0.2bn during July-April FY26. This was mainly due to a widening trade deficit amid a surge in energy imports in April, which more than offset resilient workers’ remittances, the MPC said.

Notwithstanding some expected widening in the current account deficit in FY27, reserve accumulation is expected to continue through foreign exchange purchases and the timely materialisation of planned official inflows, it added.

Fiscal sector

According to fiscal operations data for July-March FY26, fiscal consolidation efforts remained broadly on track, primarily due to expenditure restraint, the MPC said.

Despite a downward revision in revenue projections, the government expects to achieve a primary surplus of 2.5pc of GDP by containing expenditures. For FY27, it is targeting a primary surplus of 2pc of GDP.

The MPC emphasised the importance of maintaining fiscal consolidation and reiterated the need for the timely implementation of structural reforms, particularly measures aimed at broadening the tax base and reforming public sector enterprises.

Published in Dawn, June 16th, 2026