EDITORIAL: The Monetary Policy Committee met on the previously scheduled date – 15 June – and decided to keep the policy rate unchanged at 11.5 percent. This decision has generated widespread support particularly from the productive sectors who were concerned at the possibility of a rate rise subsequent to global supply shortages due to the Middle East conflict that raised prices across an entire range of essential items, including oil, fertilizer and their impact on domestic imported food items.
What is baffling in the Monetary Policy Statement (MPS), however, is the rather glaring discrepancy in the core inflation numbers it cited (8.2 percent in April and 8.7 percent in May) against those released by the Pakistan Bureau of Statistics (8 percent in April and 9 percent in May).
The MPS further noted that inflation would remain in double digits for next few months before gradually easing subsequently. Then it is expected to remain within the targeted range of 5 to 7 percent over the medium term – a projection that has been consistently highlighted in numerous MPSs spanning several years. For example, the 26 June 2023 MPS noted the medium-term target, a time period that remains undefined, of 5-7 percent by end of Fiscal Year 2025, with the addition of the protective clause; notably, “barring unforeseen circumstances.” The latest MPS cites the same protective clause “this outlook is subject to multiple risks, including geopolitical developments, the extent of pass through of global process, and uncertain food prices amidst weather-related challenges.”
It has become rather a challenge to project a policy rate rise or a fall based on headline inflation (used as the yardstick during May 2019-2022) or core inflation (used previously and perhaps since then as a more appropriate indicator to determine the policy rate). The rise in headline inflation of 0.8 percent and core inflation of 1 percent in May 2026 as opposed to April led to the policy rate remaining unchanged even though the 30 July 2025 MPC meeting kept the rate unchanged as inflation decelerated with core inflation decelerating by 0.1 percent. The 25 December 2025 MPC meeting reduced the policy rate by 50 basis points with headline inflation falling by 0.5 percent while core inflation rose by 0.3 percent against the November data.
This has prompted many an independent economist to argue that the MPC decision may consist of rubber-stamping the International Monetary Fund (IMF) recommendation as and when the country is on a programme as it has been for most of its history. Today, Pakistan is on the Fund’s twenty-fourth programme with the Fund staff’s patience at our repeated violations of the agreed conditions at a low which has led to programme delay followed by suspension as and when the government did not meet the agreed time-bound conditions and structural benchmarks.
In this context it is relevant to note that our government, like other administrations around the world, supports a lower policy rate, or an easing of the monetary policy, that would lower the cost of capital and thereby promoter growth. This policy thrust represents the IMF’s traditional macroeconomic policy recommendation that it highlighted once again in its press release dated 20 May: “The State Bank of Pakistan reiterated its commitment to maintaining an appropriately tight monetary policy stance to anchor inflation expectations and will continue to closely monitor potential second-round effects from energy price increases.” The irony is that the energy price increases are being implemented as part and parcel of the upfront harsh conditions of the Fund in its indomitable drive to attain full cost recovery, an economically sound policy, though not applicable in quite the same way in Pakistan. The reason: successive administrations, including the incumbent, refuse to end the over 500 billion rupee annual subsidy to ensure that the same tariff prevails throughout the country, a major reason for the rise in circular debt.
In addition, the heavy reliance of the government to borrow from the domestic commercial sector far outweighs the borrowing by the private sector (consisting of around 75 to 80 percent) or, in other words, any rise in the policy rate implies an ever-rising budgeted mark-up, which is spent on current expenditure that is highly inflationary policy.
Copyright Business Recorder, 2026