October 2026 Monetary Policy Assessment: Market Expectations, Macroeconomic Conditions and Policy Assessment

EXECUTIVE ASSESSMENT

PIDE recommends maintaining the policy rate at 11.5 percent at the October 2026 Monetary Policy Committee meeting, with a hawkish bias and readiness for calibrated tightening if inflation risks become more persistent. While the balance of risks has shifted toward tightening, current macroeconomic conditions do not yet establish a compelling case for an immediate rate increase.

Pakistan’s inflation outlook remains challenging but mixed. Headline inflation moderated to 10.26 percent in September, while non-food non-energy inflation also eased. However, elevated trimmed-mean inflation, weekly price pressures, and rising household inflation concerns warrant continued vigilance. Importantly, available evidence does not yet demonstrate generalized demand overheating or sufficiently broad-based second-round inflation pressures.

The central policy trade-off is between containing inflation  persistence and safeguarding a still-fragile economic recovery. GDP growth moderated sharply in the final quarter of FY2026, large-scale manufacturing growth remains modest, and private-sector credit flows indicate uneven demand conditions. Additional monetary tightening under these circumstances could impose further costs on investment and economic activity without necessarily addressing supply-driven price pressures.

Financial conditions provide mixed signals. Treasury-bill yields and KIBOR have increased, while September lending rates declined. These observations cover different periods and do not establish a uniform tightening of borrowing conditions. Higher market rates may reflect some expectation of further tightening, alongside liquidity conditions, government borrowing and term premia. The policy decision should therefore rest on the inflation outlook and broader macroeconomic conditions. Meanwhile, exchange-rate stability and the reserve position support maintaining the current stance, although rising imports and the durability of external financing require continued attention.

PIDE’s assessment therefore favours a conditional hold rather than pre-emptive tightening. A 50-basis-point increase to 12 percent remains a credible policy option if the updated inflation outlook indicates delayed convergence toward  the 5-7  percent target range, underlying inflation  becomes more persistent and generalized, or external-sector pressures intensify.

PIDE POLICY CALL

Maintain the policy rate at 11.5 percent with a hawkish bias. Easing inflation and an uneven recovery favour holding, while persistent price pressures make a cut premature. Further tightening would require stronger evidence of delayed inflation convergence or sustained external stress.