S&P Global sees cautious monetary policy despite improving economic outlook

The economy’s overall outlook is improving gradually in Pakistan, but the State Bank of Pakistan (SBP) is likely to remain cautious with its monetary policy over the near term as inflationary pressures, geopolitical concerns and climate risks continue to negatively impact the economy, according to a new S&P Global market intelligence report.

The central bank maintained the policy rate at 11.5 percent because it has been focused on maintaining macroeconomic stability while keeping inflation on a sustainable downward trend, the report said.
While vital economic metrics have strengthened in recent months, the inflation rate is staying above the central bank’s desired target, prompting S&P Global to say it is too early to take a more “accommodative” monetary policy stance. Inflation, Middle East conflict and climate change have been identified as the three major risks to the Pakistani economy, in the report.

In the future, the global ratings and analytics firm predicted that Pakistan’s economic growth will reach 3.5 percent in FY26-27 based on the positive outlook for domestic demand, economic reforms and macroeconomic stability.

S&P Global also predicted that Pakistan’s foreign exchange reserves could rise to $19.5 billion by December 2026, bolstered by better workers’ remittances, and a more favorable external sector. The current account deficit of the country is also likely to be kept within bounds, which will ease the pressure on external funding needs, the report said.
Ahmed Mobeen, the Principal Economist at S&P Global, added that fiscal discipline would continue to play a key role as Pakistan would be meeting its debt obligations. Though he noted encouraging economic improvements, inflation continues to be above the central bank’s target range.

The State Bank is, therefore, expected to follow a prudent monetary policy and will keep an eye on developments in the domestic and global economy, Mobeen added. He also added that the renewed instability in the Middle East, commodity price fluctuations and climate change are likely to impact the economic prospects of Pakistan in the coming months.

According to the report, Pakistan’s recovery efforts have continued to pick up, and it would be prudent for policy makers to focus more on price stability and external sector stability before making any drastic change in the monetary policy of the country.