ISLAMABAD, Jan 26 (ABC): The Monetary Policy Committee (MPC) of the State Bank of Pakistan on Monday decided to keep the policy rate unchanged at 10.5 percent, citing steady inflation, improving economic growth prospects, and a relatively contained current account deficit.
According to the Monetary Policy Statement issued after the meeting, headline inflation eased to 5.6 percent year-on-year in December 2025, in line with expectations. Meanwhile, core inflation remained elevated at around 7.4 percent in recent months. The committee noted that economic activity was gaining momentum faster than anticipated, mainly due to stronger performance in domestic-oriented sectors.
Inflation trends remain broadly stable
The MPC observed that recent inflation outcomes supported its earlier assessment. Although core inflation stayed relatively high, easing inflation expectations and stable food prices helped keep overall inflation within a manageable range.
Based on these trends, the committee stated that the inflation outlook remained broadly unchanged. However, it cautioned that risks persisted from global commodity prices, domestic wheat prices, and potential adjustments in administered energy tariffs.
Growth momentum strengthens in domestic sectors
Provisional data showed real GDP growth at 3.7 percent year-on-year in the first quarter of FY26, compared to 1.6 percent in the same period last year. Growth was led by the agriculture and industrial sectors.
In addition, several domestic demand indicators showed strong momentum. These included auto sales, cement dispatches, fertilizer off-take, POL sales excluding furnace oil, and higher imports of machinery and intermediate goods. Large-scale manufacturing expanded by 8.0 percent in October and 10.4 percent in November 2025, lifting cumulative LSM growth to 6.0 percent during July–November FY26.
External account remains contained despite trade gap
The MPC noted that the trade deficit widened due to higher imports and a decline in exports. In particular, food exports, especially rice, recorded a sharp fall. However, high-value-added textile exports remained resilient.
At the same time, strong workers’ remittances and rising ICT services exports helped contain the external imbalance. As a result, the current account posted a deficit of $244 million in December 2025, taking the cumulative deficit to $1.2 billion in the first half of FY26.
The central bank projected the current account deficit to remain between 0 and 1 percent of GDP in FY26.
Foreign exchange reserves exceed targets
SBP’s foreign exchange reserves surpassed the end-December target, reaching $16.1 billion as of January 16. The increase was supported by continued interbank foreign exchange purchases.
Looking ahead, the MPC projected foreign exchange reserves to exceed $18 billion by the end of June 2026, assuming the continuation of current trends in external inflows.
Fiscal pressures persist amid revenue shortfall
In the fiscal sector, Federal Board of Revenue (FBR) tax revenues grew by 9.5 percent in the first half of FY26. This was significantly lower than the 26 percent growth recorded in the same period last year, resulting in a revenue shortfall of Rs329 billion.
Although interest payments declined and overall expenditures remained relatively contained, the MPC cautioned that achieving the annual primary surplus target would be challenging.
Money supply and credit expansion accelerate
The committee reported that broad money growth rose to 16.3 percent by January 9, driven by increased private sector credit and government borrowing. Private sector credit expanded by Rs578 billion during FY26 so far.
Given the improving growth outlook, the MPC projected real GDP growth for FY26 in the range of 3.75 to 4.75 percent. Headline inflation is expected to stabilise within the 5–7 percent target range in FY26 and FY27.