SBP expected to keep the Policy Rate unchanged at 11%

The State Bank of Pakistan’s Monetary Policy Committee (MPC) is highly anticipated to maintain the policy rate unchanged at 11% in its upcoming meeting on October 27, 2025. This decision is driven by a complex mix of opposing economic forces. Significant upside risks to inflation from recent flood disruptions and energy price adjustments are the primary culprits. However, this is countered by strengthening external sector stability, evidenced by a current account surplus and stable PKR, and a rebound in industrial activity, with the LSM index growing at 4.44% YoY. The MPC is expected to prioritize anchoring inflation expectations while leveraging the improved external position to adopt a “wait-and-see” approach, assessing the full impact of the flood-induced economic disruptions before making any policy rate cut.

Key Factors

Inflation Pressures Intensify

Headline inflation surged to 5.6% in September 2025 from 3.0% in August
Weekly SPI shows 4.57% YoY increase as of October 16, 2025
Flood impacts disrupting food supplies and key crops like cotton

External Sector Shows Strength

Current account shifted to USD110 million surplus in Sep’25 from USD325 million deficit in Aug’25.
Strong forex reserves supporting PKR stability against USD
Cumulative Q1 FY26 CAD widened to USD594 million, requiring continued vigilance

Manufacturing Recovery Underway

LSM growth recorded at 4.44% YoY for Jul-Aug FY26
Automobile production surged 130.68% YoY in August 2025
Cement output grew 18.55% YoY in August 2025
Current 11% policy rate appears compatible with industrial expansion

Policy Balance Considerations

The State Bank of Pakistan maintains its tight monetary policy stance at 11% to achieve multiple objectives simultaneously. This calibrated approach serves to moderate domestic demand pressures that typically drive import growth, thereby helping to manage the current account position while still allowing space for industrial recovery to continue. The policy rate at this level represents a careful balance, it aims to temper inflationary expectations and consumption-driven import demand without completely stifling the productive sectors of the economy that are showing signs of recovery, as evidenced by the 4.44% LSM growth.

Courtesy – AHCML Research