SBP Holds Policy Rate at 11% Amid Flood Impact on Economy

The State Bank of Pakistan (SBP) announced on Monday that the Monetary Policy Committee has kept the interest rate unchanged at 11 percent in its meeting held on September 15, 2025, citing moderate inflation and stronger economic momentum but warning of risks from widespread flooding. The central bank said inflation eased to 3% in August after 4.1% in July, with core inflation continuing to decline, though at a slower pace. However, it cautioned that flood-related supply shocks, especially to crops, could push headline inflation temporarily above its 5-7% target range in the second half of fiscal 2026. Large-scale manufacturing grew 3% year-on-year in the fourth quarter of FY25, supported by strong demand indicators, but GDP growth for FY26 is now expected near the lower end of the 3.25-4.25% projection range due to crop damage. The MPC said prospects for Rabi crops had improved, which may partly offset losses. On the external front, the current account posted a $254 million deficit in July 2025 amid higher imports and softer remittances. Still, foreign exchange reserves stood at $14.3 billion in early September and are projected to reach $15.5 billion by December, with the deficit expected to remain in the 0-1% range of GDP. The fiscal outlook showed tax revenues rising 14.1% year-on-year in July–August, while a Rs2.4 trillion profit transfer from the SBP and higher petroleum levies are expected to generate a strong primary surplus in the first quarter. The MPC noted, however, that flood-related expenditures could strain finances. Private sector credit grew 14.1% year-on-year, led by textiles, telecom, and trade, reflecting improved financial conditions. The central bank said continued reforms, including broadening the tax base and restructuring state-owned enterprises, are critical to build buffers and ensure sustainable growth. The MPC concluded that maintaining the current rate provides adequate support to price stability while the economy absorbs the impact of floods.