KARACHI: The State Bank of Pakistan held its benchmark interest rate steady at 11 percent for a second consecutive meeting on Wednesday, opting for caution amid rising inflation risks and pressure on the trade balance.
The SBP surprised analysts and the markets by keeping interest rates unchanged, despite expectations for another rate cut.
In a statement outlining its decision, the central bank said the inflation outlook has somewhat worsened due to higher-than-expected adjustments in energy prices, particularly gas tariffs. Nonetheless, inflation is projected to stabilise in the target range going forward.
The Monetary Policy Committee (MPC) noted that the trade deficit is expected to widen further in fiscal year 2026 due to a rebound in economic activity and a slowdown in global trade.
“Given this macroeconomic outlook and the emerging risks, the MPC considered today’s decision as necessary to ensure price stability,” the SBP said in the statement.
Inflation is expected to mostly remain in the range of 5-7 percent in FY26, although it may exceed the upper limit in some months, Governor SBP Jameel Ahmad said in a press conference following a monetary policy meeting.
“For FY26, we assess that the current account will shift to a deficit, projected to be in the range of 0 to 1 percent of GDP. This will be influenced by global trends, the level of remittances and export performance,” Ahmad said.
According to Ahmad, remittances — a crucial factor in stabilising the current account — were exceptional last year, showing significant growth with an increase of $8 billion as overseas Pakistanis sent money home through official channels, aided by government incentives and the support from the SBP. However, this year, remittances are not expected to grow at that significant rate.
“We project remittances will rise to over $40 billion in FY26, compared to $38.3 billion a year before,” he said.
The SBP expects real GDP growth to rise to between 3.25 percent and 4.25 percent this year, up from a provisional estimate of 2.7 percent for FY25. This optimistic outlook is based on anticipated improvements in agriculture and a recovery in industrial activity, which began last year and is expected to continue into FY26.
The SBP held rates in June after a 100-basis-point reduction in May, marking a return to easing following a pause in March. Since June 2024, it has cut its policy rate by a total of 1,100 basis points, bringing it down from a record high of 22 percent as inflationary pressures eased.
Governor Ahmad stated that the external debt repayment for FY26 is projected to be $25.9 billion, similar to FY25. This amount includes $22 billion in principal and $4 billion in interest payments. Approximately $16 billion of this debt is expected to be rolled over. The rollovers will consist of bilateral deposits, bilateral commercial loans and other international loans. This leaves $10 billion to be repaid, which includes $4 billion in interest payments and $6 billion in principal repayments.
In response to critics who claim that the SBP’s reserves are increasing due to foreign loans, the Governor clarified that, on a net basis, Pakistan’s foreign debt level has remained static for the past three years. From 2015 to 2022, the country’s foreign public debt grew from $55 billion to $100 billion; however, there has been no increase in the last three years. Therefore, he does not foresee any difficulties in meeting debt repayments in the future. The composition of external debt has improved favourably, with multilateral institutions such as the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank now constituting 50 percent of public debt (including SBP and government debt), compared to 43 percent in June 2022. Additionally, the maturity of this debt has also improved. Debt from multilateral sources tends to be more favourable due to its lower cost, which has led to gradually decreasing interest payments for the country, despite rising interest rates in international markets. Regarding foreign exchange reserves, Ahmad said that they are expected to reach $15.5 billion by December 2025 and $17.5 billion by June 2026. During the analysts’ briefing, he mentioned that recent upgrades in credit ratings would facilitate commercial borrowing. He also noted that the SBP has recently met with officials from another rating agency and anticipates an upgrade from that entity as well. Any funds raised through Eurobonds or Sukuks in the international market will contribute to the $17.5 billion target.
When asked about the pressure on the rupee and its subsequent strengthening following a crackdown by security agencies on black market dollar trading, Ahmad explained that there are three currency markets in Pakistan. Two of these markets—the interbank market and the exchange companies market—are regulated by the central bank. The third market is the illegal or grey market, which operates outside of regulation.
Ahmad stated that the SBP closely monitors transactions in both the interbank and exchange companies’ markets. If any issues arise in these regulated markets, they take appropriate action. However, the open or grey market is beyond its control, and any illegal activities conducted there are addressed by law enforcement agencies.
He noted that the margins between the interbank and open market dollar rates have narrowed in recent days. The SBP will continue to seek assistance from law enforcement agencies as needed to curb illegal FX activities. Additionally, Ahmad highlighted that the market was concerned when the government reduced remittance incentives and did not allocate a budget for the Pakistan Remittance Initiative scheme for FY26. However, the market became more comfortable after the prime minister announced that the scheme would continue and that remittance incentives for financial institutions would be maintained as per the prime minister’s directives.
However, the SBP said in the statement that going forward, remittances are projected to grow at a slower pace due to the high base effect and recent rationalisation of home remittances incentive schemes.
