SBP keeps policy rate unchanged at 11.5%

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

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

The SBP has held the rate steady since raising it by 100 basis points in April, its first increase in nearly three years, after a surprise 50 bps cut in December 2025, and holds in January and March.

In its statement, the MPC said that the status quo was a majority decision taken by seven out of ten members.

“The Committee noted that the recent intensification of the prolonged Middle East conflict has led to further increase in already elevated global commodity prices, while supply chain disruptions have persisted,” read the statement.

“However, recent domestic macroeconomic data turned out broadly in line with the MPC’s expectations. Headline inflation increased to 11.1 percent y/y in August from 9.2 percent in July, while core inflation was slightly lower than expectations. External account pressures remained contained, supported by robust workers’ remittances and higher financial inflows.

“Meanwhile, economic activity, after witnessing a slowdown in Q4-FY26, started to pick up gradually, as reflected by recent high-frequency indicators.

“In this context, 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. However, uncertainty regarding the outlook has increased, particularly from the worsening geopolitical environment,” the MPC said in its statement.

Key developments since last MPC

The MPC noted the following key developments since its last meeting:

“First, Pakistan’s sovereign credit rating was upgraded to B3 by Moody’s with a stable outlook. Second, the country successfully tapped international capital markets to raise $3 billion through Eurobonds, which, along with continued FX purchases, helped increase SBP’s FX reserves to over $21 billion.

“Third, inflation expectations of both businesses and consumers increased in September, while their confidence weakened. Fourth, large-scale manufacturing output declined by 3.5 percent in June, bringing cumulative FY26 growth to 5%.

“Fifth, fiscal consolidation turned out higher than the budgetary target during FY26. Moreover, FBR tax collection remained on-target during July-August FY27 while SBP transferred higher profit of Rs1.9 trillion than budgeted amount of Rs1.4 trillion to the government.

“Lastly, central banks have become more cautious amidst challenging global economic conditions,” read the statement.

Geopolitics & weather disruptions risk outlook

The central bank said that it continues to closely monitor incoming data and ongoing situation in the Middle East.

“The Committee also noted that shocks such as adverse geopolitical events and weather-related disruptions have become more frequent and continue to pose risks to the macroeconomic outlook.

“Against this backdrop, the MPC emphasized the need to maintain prudent monetary and fiscal policy mix and further buildup of buffers to absorb supply shocks.

“This, along with timely implementation of structural reforms, is essential to enhance resilience, raise productivity, and support higher and sustainable growth.”

Inflation outlook

The MPC was of the view that the recent inflation outturns are driven largely by food inflation in the wake of elevated prices of wheat and allied products, and perishable items.

“At the same time, intensification of the conflict in the Middle East has kept energy inflation at elevated levels,” it said.

The MPC noted that the recent change in the HSD pricing mechanism led to a sharp reduction in its prices in August and has partially offset the impact of higher global prices on domestic inflation.

“Meanwhile, real positive interest rate on forward-looking basis is likely to keep demand-side pressures in check and contain the second-round impacts emanating from food and energy inflation. On balance, the inflation outlook for FY27 remains broadly unchanged from the previous assessment, and inflation is expected to gradually ease towards the upper bound of 5-7 percent target range by June 2027; though the risks to the outlook have increased significantly.

“The key risks include volatility in global commodity prices, magnitude of adjustments in electricity and gas tariffs, supply disruptions, and unexpected movements in food prices amidst the worsening El Niño conditions.”

Previous MPC

At its previous meeting on July 27, the central bank’s MPC, despite signs of improvement in Pakistan’s macroeconomic outlook, left the policy rate unchanged at 11.5%, citing heightened external risks following the resurgence of conflict in the Middle East.

“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 at the time.

SBP maintains status quo, cites Middle East risks

Earlier, a number of analysts expected the SBP to maintain the status quo, as mounting inflationary pressures from elevated global oil prices could limit the scope for monetary easing.

“We expect the SBP to keep the policy rate unchanged at 11.5%, maintaining a balanced approach amid improving external buffers and renewed inflationary pressures,” said Ismail Iqbal Securities.

“While forward inflation is expected to remain in single digits on average, intensifying energy price pressures and regional uncertainty could sustain upside risks to the inflation outlook, warranting a cautious stance,” it added.

Similarly, in a poll conducted by Topline Securities, 84% of respondents expected the policy rate to remain unchanged. Meanwhile, 14% expect the policy rate to rise by 50bps, and 2% expected the policy rate to rise by 100bps.

Market participants’ expectations were largely driven by annual inflation expectations, which, at current oil prices of $95 per barrel, remain largely below 9% (FY27 avg), suggesting a positive real spread of over 250bps, in line with historic real rates. Furthermore, improving reserves and a contained current account balance were also augmenting the status quo view of participants.

Analysts at Topline also expected the SBP to maintain the policy rate at 11.5% mainly due to sufficient real spread and improving external outlook, especially after the recent $3 billion Eurobond launch.

However, if oil prices and food inflation remain sticky, this could also warrant a rate hike of 50-100bps in upcoming MPC meetings, particularly in October or December 2026.

Another brokerage house, JS Global, also expected the MPC to hold the policy rate at 11.5%. “However, if geopolitical tensions persist into the December quarter, the next move would be an increase,” said JS Global.

“This risk is increasingly credible, with one-third of respondents in our recent survey expecting a hike by Dec-26,” the brokerage house added.