With inflation cooling but still refusing to settle, and an uneven economic recovery leaving little room for another monetary squeeze, economists have recommended that the State Bank of Pakistan (SBP) keep its policy rate unchanged at 11.5% at its July 27 monetary policy meeting. The recommendation comes as policymakers face a delicate balancing act. Headline inflation has eased, but underlying price pressures remain elevated, while improved external conditions provide some breathing space without shielding the economy from fresh shocks.
According to the July 2026 Monetary Policy Assessment by the Macro Policy Lab, a research centre at the Pakistan Institute of Development Economics (PIDE), headline Consumer Price Index (CPI) inflation eased to 11.1% in June, while urban and rural core inflation remained elevated at 8.7% and 7.9%, respectively. The report titled "Market Expectations, Macroeconomic Conditions and Policy Assessment," prepared under the PIDE Monetary Policy Tracker, observed that much of the recent inflationary pressure had originated from food, energy, transport and administered prices, which monetary policy cannot directly reverse. However, it cautioned that the recent rebound in the weekly Sensitive Price Indicator (SPI) warranted vigilance against assuming that disinflation had become firmly entrenched.
Market signals broadly support maintaining the status quo. Short-term Treasury bill yields remain close to the policy rate, while the overnight rate is also aligned with the existing monetary stance. Higher six- and 12-month yields point to medium-term caution rather than an immediate case for easing or further tightening, it noted.
The assessment also found that economic recovery had strengthened but remained uneven, with recent momentum in large-scale manufacturing still soft. With little evidence of demand-driven overheating, another rate hike could impose additional costs on investment and economic activity without directly addressing the supply-side and administered-price shocks driving inflation. Improved external conditions have created some breathing space.
Stronger foreign exchange reserves, robust remittances and an orderly exchange rate have eased immediate external pressures. However, the wide merchandise trade deficit, upcoming external repayments and continued reliance on imported energy leave the economy exposed to renewed ex…
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