SBP maintains status quo, cites Middle East risks

The State Bank of Pakistan (SBP) Monetary Policy Committee (MPC), in its first meeting in fiscal year 2026-27, decided to keep the policy rate unchanged at 11.5%.

The MPC met for the fifth time this year. The decision was in line with market expectations.

In a press briefing, the SBP Governor Jameel Ahmad said that CPI inflation is expected to decline in July. “We expect the CPI to clock in at the upper band of our target range of 5-7% by the end of this fiscal year,” said Ahmad.

In its statement, the SBP said that the committee assessed that the macroeconomic outlook has improved from its previous meeting, though it remains susceptible to heightened risks, particularly following the resurgence of conflict in the Middle East.

“Meanwhile, the committee observed that the earlier de-escalation had led to a decline in global oil prices and a relative ease in supply chain disruptions, which resulted in some improvement in recent economic indicators.

“Headline and core inflation moderated in June, though both remained at elevated levels. At the same time, incoming high-frequency indicators pointed to some pickup in economic activity, whereas external account pressures remained moderate.

“Taking into account these developments and evolving risks, the MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7% over the medium term,” it said.

The SBP noted the following key developments since its last meeting.

“First, SBP’s FX reserves surpassed the end-June 2026 target of $18 billion, largely due to continued FX purchases amidst a small current account deficit in FY26, and realisation of planned official inflows.

“Second, Pakistan’s sovereign credit rating was upgraded to “B” by Standard & Poor’s.

“Third, inflation expectations eased for both consumers and businesses in the latest sentiment surveys, while confidence indicators showed a mixed picture.

“Fourth, FBR met its revised tax revenue target for FY26.

“Lastly, the IMF increased its global inflation forecast for both CY26 and CY27 in the latest World Economic Outlook amidst an increase in global commodity prices,” the MPC said.

GDP & C/A

The MPC expects real GDP growth to be in the range of 3.5–4.5% during FY27.

“However, the risks emanating from volatile global commodity prices amidst re-escalation of tension in the Middle East and uncertain weather conditions, including from the evolving El Niño effects, may weigh on the growth prospects,” it said.

Meanwhile, the SBP expects the current account deficit to widen in line with the pickup in economic activity, though it is assessed to remain in the range of 0 to 1 percent of GDP in FY27.

“Workers’ remittances are likely to grow as compared to last year and continue financing a large part of the higher projected trade deficit. With the realisation of planned official inflows and some likely improvement in private flows, SBP’s FX reserves are targeted to increase to $20.20 billion by end-December 2026,” it said.

Inflation Outlook

Going forward, the MPC noted that the recent increase in global commodity prices, higher input costs and domestic food price pressures are likely to keep inflation above the target range over the next few months.

“Inflation is subsequently projected to ease gradually and stabilise near the upper bound of the 5-7% target range by June 2027.

“This outlook is subject to multiple risks, including volatility in global energy prices, unanticipated adjustments in administered energy prices, unfavourable climate conditions and potential fiscal slippages,” the MPC said.

Previous MPC

In the previous MPC meeting held on June 15, 2026, the central bank’s MPC decided to maintain the policy rate at 11.5%, stating that the current monetary stance remains appropriate to steer inflation towards the medium-term target range of 5-7%.

Earlier, analysts expected the SBP to keep its benchmark policy rate unchanged, as escalating geopolitical tensions in the Middle East and rising oil price risks overshadow improving domestic inflation and mounting arguments for monetary easing.

In a poll conducted by Topline Securities, 97% of respondents expect the policy rate to remain unchanged at the Jul 27, 2026 MPC meeting. Meanwhile, the remaining 3% anticipate a 100bps cut.

In its report, AKD Securities said that a comfortable external account position, supported by tight monetary policy, prudent fiscal management, improving credit rating and continued progress on structural reforms, is a positive economic indicator.

SBP should resist the temptation to blink

At the same time, weakening leading economic indicators and a contraction in money supply strengthen the case for supportive monetary easing.

“However, renewed geopolitical tensions following the escalation of the US-Iran conflict, including the re-closure of the Strait of Hormuz and Houthi threats of a naval blockade targeting Saudi Arabia, have heightened uncertainty.

“This, along with upcoming floods forecast during the last week of this month, has renewed inflationary pressures.

“Subsequently, we expect the SBP to maintain the policy rate unchanged at the upcoming MPC meeting,” it said.

Topline echoed similar views; it noted that following the signing of the US-Iran Memorandum of Understanding (MoU) on June 18, 2026, the easing of geopolitical tensions and the softer international oil prices led market participants to increasingly price in cumulative rate cuts of 100–150bps over the next two to three MPC meetings.

SBP releases MPC calendar for FY27, doubles press briefings

However, renewed tensions between the US and Iran over the past two weeks have reversed part of that optimism.

“In light of these developments, we expect the SBP to maintain the policy rate at 11.5% in its July 27, 2026 MPC meeting,” it said.

Similarly, JS Global noted that renewed geopolitical flare-ups and disruptions to critical energy trade routes have elevated global uncertainty, prompting expectations of a cautious stance from the SBP.

“With external risks outweighing the case for further easing, MPC is likely to keep the policy rate unchanged at 11.50%,” the brokerage house said.

Industrialists disappointed

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) expressed profound disappointment on the SBP’s decision.

The apex trade body termed the decision as “contractionary,” warning that holding the benchmark interest rate at an elevated level will continue to stifle economic activity, hamper access to finance, and severely undermine industrial revival efforts across the country.

Saquib Fayyaz Magoon, Acting President of FPCCI, categorically denounced the central bank’s cautious approach, emphasising that the business community had anticipated some reduction to help bring down the exorbitant cost of doing business – and facilitate trade & industry to cope with the economic challenges.