Holding policy rate: the right decision

EDITORIAL: The Monetary Policy Committee kept the policy rate unchanged at 11.5 percent which must be supported.

Any increase in the rate would have made borrowing costs for the government (the single largest borrower) as well as the private sector prohibitively expensive that, in turn, would have impacted negatively on the growth rate.

And a decline would have been opposed by the International Monetary Fund (IMF), which on 20 May at the conclusion of the third quarterly review mission argued that the “State Bank of Pakistan (SBP) 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.”

Inflation expectations are rising globally due to the ongoing and widening Middle East conflict as well as the Russia-Ukraine conflict.

However, it is relevant to note that the primary objective of the State Bank of Pakistan is to achieve and maintain domestic price stability, set out in Section 4 B of the SBPO Act 1956 (as amended up to January 2022 – an amendment, which was an IMF tranche release condition that sought to make the apex bank and its senior officials independent of any influence from the executive branch of government).

SBP’s website clarifies that “price stability means the maintenance of low and stable inflation guided by the government’s medium term inflation target,” and in this context it is relevant to note that this target range of between 5 to 7 percent has not wavered in most of the past year’s monetary policy statements (MPS).

It is therefore no surprise that the 14 September MPS maintains that “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 risks to the outlook have increased significantly.” The risks itemised 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 Nino conditions.”

Be that as it may, there are concerns that the IMF mission, scheduled to arrive on 23rd of this month for the fourth quarterly review whose success would trigger the next tranche release, may insist on a rise in the policy rate if geopolitics continue to impact negatively on fuel prices. And, for a country like Pakistan that is currently on a harsh upfront Fund programme with as noted in the MPS “second round effects from energy price increases” this may imply inflation rising at a faster rate than in other countries.

The rate of inflation in regional countries is less than in Pakistan with the August rate in India of 4.82 percent, in Bangladesh at 8.2 percent, in Sri Lanka 8 percent, and China at 0.8 percent – a rate reflective of their respective state of economies.

In Pakistan, however, the Consumer Price Index rose from 9.2 percent in July to 11.1 percent in August – a rise of 1.9 percent. It is relevant to note that the policy rate was raised on 27 April by 100 basis points (from 10.5 percent) as inflation rose from 10.9 percent in April to 11.7 percent in May or by 0.8 percent. Today inflation is rising daily mainly attributable to the government’s decision to adjust the prices of petroleum products every 24 hours since 17 July – a decision reflecting the fluctuations in the international market.

And finally, the next MPC is scheduled to meet on 26 October and one would, therefore, hope that inflation declines as the geopolitical factors are no longer relevant that would enable the MPC to reduce the policy rate - a pro-growth initiative.

Copyright Business Recorder, 2026