Introduction to Monetary Policy
The State Bank of Pakistan (SBP) recently made a significant decision regarding the country’s monetary policy. On October 27, 2025, the Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 11 percent. This decision was made after careful consideration of the impact of recent floods and higher food prices on inflation.
Understanding the Decision
The MPC noted that headline inflation had risen significantly to 5.6 percent in September, while core inflation remained unchanged at 7.3 percent. The rise in headline inflation was largely due to the expected flood-induced increase in food prices, an uptick in energy prices, and sticky core inflation. However, the committee observed that the recent surge in food prices appeared to be milder than anticipated earlier.
Economic Outlook
The MPC expects inflation to exceed the upper bound of the target range for a few months in the second half of FY26, before reverting to the target range in FY27. This outlook is subject to risks from volatile global commodity prices, the magnitude and timing of future energy price adjustments, and uncertainty around prices of wheat and allied products and perishable food items. The impact of the recent floods on the broader economy appears to be somewhat lower than anticipated, with crop losses likely to be contained and supply disruptions minimal.
Macroeconomic Developments
Economic activity has gained further momentum, as depicted by robust growth in high-frequency economic indicators. The overall macroeconomic outlook has improved from the previous assessment, but uncertainties remain due to volatile global commodity prices, challenging export prospects, and potential domestic food supply frictions. The MPC noted some key developments since its last meeting, including a revision in real GDP growth in FY25 to 3 percent from the previous estimate of 2.7 percent.
Key Developments
Other key developments noted by the MPC include initial estimates of major kharif crops by the Federal Committee on Agriculture, which remained close to last year’s production despite the recent floods. The SBP’s foreign exchange reserves continued to increase, despite the repayment of a $500 million Eurobond. Pakistan also reached a staff-level agreement with the IMF on the EFF and RSF reviews. Inflation expectations of both consumers and businesses eased in the latest SBP-IBA sentiment surveys.
Conclusion
In conclusion, the MPC’s decision to keep the policy rate unchanged at 11 percent is aimed at maintaining price stability and supporting economic activity. The committee views the real policy rate as adequately positive to stabilize inflation within the target range of 5-7 percent over the medium term. The importance of continued build-up in external and fiscal buffers, coordinated and prudent monetary and fiscal policies, and structural reforms cannot be overstated. These efforts will be crucial in ensuring sustainable economic growth and addressing the social and fiscal challenges facing the country.
