PakStox Outlook

The State Bank of Pakistan (SBP) released its latest Monetary Policy Report (MPR), outlining recent economic developments, policy decisions, and the macroeconomic outlook. With the policy rate held at 11% in June and July, the SBP expects inflation to remain within its medium-term target. The report projects moderate economic growth, manageable external pressures, and a steady buildup in foreign exchange reserves through FY26, while highlighting potential domestic and global risks. Key Highlights Policy Rate: Held steady at 11% in June and July MPC meetings to keep the real policy rate adequately positive for inflation stability. Inflation Outlook: SBP’s fan chart suggests inflation will stay within the medium-term target range. External Account: Trade deficit expected to widen; current account deficit projected at 0–1% of GDP in FY26 despite strong remittance growth. FX Reserves: Projected to rise to $15.5 billion by December 2025, supported by financial inflows and S...

There's a certain hint of optimism that the Monetary Policy Committee might reduce the policy rate at its upcoming meeting on June 10th.  However, such hopes have been dashed before, as in April's meeting, when the State Bank of Pakistan kept the rate at a record high of 22% for the seventh consecutive time. It has been almost a year now since we reached this level, with rates first being raised in June last year. Several factors are rekindling hopes for a rate cut: a slight decline in the Karachi Interbank Offered Rate (KIBOR), T-bills rates, recent reductions in petrol prices, a slower pace of price increases, and a current account surplus. But it's crucial to recognize that a reduction based solely on a few positive indicators might be shortsighted. It could create the false impression that the real underlying causes of our high rates have been addressed. So far, I haven't observed any structural changes in the data flow indicating that the rates should come down.  C...