1. The Monetary Policy Committee (MPC), in its meeting today, decided to increase the policy rate by 100 bps to 11.50 per cent,t with effect from April 28, 2026. The Committee noted that prolonging the Middle East conflict has intensified risks to the macroeconomic outlook. In particular, global energy prices, freight charges, and insurance premiums remain significantly above pre-conflict levels. Furthermore, the supply chain disruptions have contributed to the prevailing uncertainty. While the incoming data has broadly been in line with the MPC’s expectations so far, the impact of these global developments will be evident in key economic indicators going forward. In this backdrop, the Committee assessed that inflation is likely to increase and remain above the target range in the next few quarters. Accordingly, the MPC deemed it necessary to maintain a tighter policy stance to keep inflation expectations anchored and contain the second-round effects of the current supply shock, thereby bringing inflation within the target range. This will be important for preserving macroeconomic stability, which is necessary to achieve sustainable economic growth.

2. Apart from the geopolitical events in the Middle East, the MPC noted the following key developments since its last meeting. First, inflation rose to 7.3 per cent in March. Core inflation inched up to 7.8 per cent. Secondly, the expectations and confidence of consumers and businesses deteriorated in the latest surveys. Third, real GDP grew by 3.8 per cent in H1, compared with 0.9 per cent in the same period last year. Fourth, the current account posted a small surplus during July-March FY26. Fifth, despite significant debt repayments, SBP’s FX reserves as of April 24, 2026, are around $15.8 billion, supported by the issuance of Eurobonds, as Pakistan re-entered international capital markets after a gap of over four years. Lastly, the staff-level agreement with the IMF was reached on March 27, 2026.

3. In light of the above developments and evolving risks, the MPC viewed today’s decision as important to achieve the objective of price stability over the medium term. The Committee reiterated the importance of the continued buildup of external buffers and fiscal discipline. These efforts have contributed to stronger initial economic conditions at the start of the ongoing geopolitical conflict than during similar shocks in the recent past. The MPC also emphasised the importance of undertaking structural reforms to make the external account more resilient to the evolving global landscape and to ensure sustainable economic growth.

Real Sector

4. Real GDP growth was provisionally recorded at 3.9 per cent in Q2-FY26, bringing cumulative H1-FY26 growth to 3.8 per cent, reflecting a broad-based improvement in economic activity compared with the same period last year. Large-scale manufacturing posted a robust performance, growing 9 per cent in February FY26. High-frequency indicators in the industry and services sectors point to strong momentum in economic activity. In agriculture, growth prospects have moderated slightly, driven mainly by lower-than-anticipated figures, according to the first estimates reported by the Federal Committee on Agriculture. This, along with the expected spillover of the ongoing Middle East conflict on industrial and services sector activity in Q4, is expected to result in real GDP growth for FY26 turning out closer to the lower bound of the earlier projected range. The moderation in economic activity is likely to continue in FY27, though the outlook remains subject to multiple risks, including the duration and intensity of the ongoing conflict.

External Sector

5. The consecutive surpluses in February and March led to a small, positive current account surplus of 6 for July-Mar. This was mainly supported by resilient workers’ remittances. The current account in FY26 is now likely to remain closer to the lower bound of the earlier projected range, despite a challenging external environment, including a significant worsening of the terms of trade. On the terms of trade side, the government has proactively raised external financing through enhanced bilateral arrangements and the issuance of Eurobonds, which cushioned the impact of recent debt liability repayments on SBP’s FX reserves. In this regard, SBP’s FX reserves are now assessed to reach above $18 billion by June 2026. Going forward, the Committee emphasised the need for further strengthening amid uncertain economic conditions.

Fiscal Sector

6. FBR tax collection remained short of target in March, widening the cumulative shortfall to Rs611 billion during July–March FY26. Nonetheless, the financing side that indicated a deficit remained contained till March. The ongoing Middle East conflict has been challenging in terms of management. The pass-through of higher international oil prices to domestic consumers necessitated targeted subsidies for vulnerable groups. With a full-year primary surplus target, a larger cut in expenditures may be required. In this regard, the MPC emphasised the need for sustained fiscal reforms, including broadening the tax base and curtailing SOE losses, to strengthen fiscal sustainability and resilience.

Money and Credit

7. Broad money growth decelerated to 14.5 per cent as of April, down from 16.0 per cent in February. This moderation primarily reflects a deceleration in net budgetary borrowing from the banking system. Meanwhile, credit to the private sector continued to grow around 13 per cent, in line with improving economic activity and the lagged impact of earlier policy rate cuts. During July-March FY26, the private sector credit flows expanded across working capital, fixed investment and consumer finance. Sectoral flows were concentrated in textiles, wholesale and retail trade, and chemicals, while the sustained rise in consumer financing points to a recovery in household demand. On the liability side, both currency in circulation and deposits decelerated since the last MPC meeting.

Inflation

8. Headline inflation rose to 7.3 percent in March, while core inflation also inched up to 7.8 percent. Inflation was projected to increase towards the target range before the start of the Middle East conflict, mainly due to the inverse base effect. Subsequently, the energy price shock has led to a surge in fuel prices, which have already begun to seep into core inflation via transport fares, though contained food inflation amidst ample supplies is likely to offset some of the impact on headline inflation. Nonetheless, the current supply shock may push inflation into double digits in the coming months before it starts to ease. Inflation is expected to stay above the remaining bound of the target range of 5 – 7 percent fo osper cent27. The MPC noted that this outlook is subject to multiple risks, particularly the duration and intensity of the ongoing conflict, the extent of pass-through of changes in global energy prices to the domestic economy, and potential fiscal slippages.