Pakistan holds key rate steady to stabilize inflation
KARACHI: Pakistan's central bank left its key interest rate unchanged at 11 percent on Wednesday, saying the outlook for inflation had deteriorated due to energy prices, surprising analysts who had expected another cut. The Monetary Policy Committee of the State Bank of Pakistan said in a statement that energy prices, particularly for gas, had risen more than expected. The panel also noted that the trade deficit was expected to widen further in the fiscal year ending June 2026, amid a pickup in economic activity and a slowdown in global trade.
'The inflation outlook has somewhat worsened,' it said. 'Given this macroeconomic outlook and the emerging risks, the MPC considered today's decision as necessary to ensure price stability.' In a Reuters poll this week, all 15 analysts said they expected the SBP to ease, with nine forecasting a 50 basis-point cut, four predicting a deeper 100 basis-point reduction and two projecting a smaller 25 basis-point cut. 'You have to be cautious,' State Bank Governor Jameel Ahmad, told a news conference in Karachi, after announcing the policy rate, saying it is better to wait than to take action and then have to reverse it.
Pakistan is pushing through a series of economic reforms under a $7 billion International Monetary Fund Program, including a contractionary government budget passed in June that slashes spending to curb its fiscal deficit. In its Economic Outlook Update on Tuesday, the IMF cut its growth forecast for Pakistan for the fiscal year ending June 2026 to 3.6 percent, well below the government's 4.2 percent target.
The Committee assessed that the real policy rate should be adequately positive to stabilize inflation in the target range of 5 percent–7 percent, the statement said. Headline inflation slowed to 3.2 percent in June and is projected at 3.5 percent–4.5 percent in July, within the SBP's 5.5 percent–7.5 percent target range for the fiscal year ending June 2026. The State Bank took a cautious stance given the fragile situation of the currency and the balance of payments, said Adnan Sheikh of Pakistan Kuwait Investment Company, a Pakistani development financial institution.
'It opted to wait and see the impact of recent monetary easing, and the crop situation given the flooding,' he said, referring to heavy monsoon rains across the country this month. The SBP held rates in June after a 100 basis-point cut in May. Since June 2024, it has lowered its policy rate by 1,100 basis points from a record 22 percent as price pressures receded. The government says the economy has stabilized, but analysts warn growth remains fragile and global commodity price swings could still add pressure on prices and external balances. GDP is projected to grow between 3.25 percent and 4.25 percent this year, the governor said. — Reuters
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