The SBP is expected to maintain the policy rate at 11.0% in the Sep’25 meeting, in our view. While current headline inflation and external stability provide room for easing, the impact of recent floods, leading to inflationary pressures, fiscal concerns, and the risk of current account slippage, warrants caution.

§  Headline CPI eased to 3.0% in Aug’25 from 4.1% in Jul’25, while core inflation held steady at 7.3%. For FY26, average inflation is now projected to exceed 7%, edging slightly above the SBP’s medium-term target band of 5–7%. This upward revision reflects risks of food inflation due to flood-induced supply disruptions. The impact is already visible, with first-week SPI data reporting double-digit MoM spikes in key staples such as wheat, tomatoes, onions, and other vegetables.

§  The current account deficit clocked in at USD 254mn in Jul’25, narrower than the USD 348mn shortfall recorded in the same month last year. The PKR has appreciated 0.7% FYTD, while S&P recently upgraded Pakistan’s rating to B- (Stable). That said, external pressures may re-emerge as imports pick up, particularly in agriculture and cotton, to offset flood-related damage to domestic production

§  LSM output posted a 4.1% YoY increase in Jun’25, though it fell on a monthly basis. For FY25, LSM recorded a small annual contraction of 0.7%. Looking ahead, LSM is expected to gain momentum as macro indicators stabilize and domestic demand recovers. Additionally, construction activity tied to post-flood rehabilitation should provide further support to industrial output.

§  The bond market also signals an unchanged policy stance, with yields largely stable across the curve. Since the last MPS, yields have remained largely unchanged across the curve. In longer tenors, the 3-year and 5-year papers rose modestly by 9bps and 5bps, while the 10-year PIB edged down by 16bps. On the short end, 3-month and 6-month T-bill yields increased by 15bps each, whereas the 12-month tenor slipped by 30bps.

Courtesy –AHL Research