Think tank urges sustained tight monetary stance as inflation, liquidity stress and structural issues challenge SBP policy effectiveness
KARACHI: The Institute of Cost and Management Accountants of Pakistan (ICMAP) has warned that Pakistan’s monetary transmission mechanism is facing increasing strain due to rising inflation, liquidity pressures, and external economic uncertainties, even as the State Bank of Pakistan (SBP) maintains a tight monetary policy stance.
In its 24th Monetary Policy Statement Review, issued by the Research and Publications Department, ICMAP analysed the recent decision of the SBP Monetary Policy Committee (MPC) to keep the policy rate unchanged at 11.50 percent in its meeting held on June 15, 2026.
The institute said the decision reflects a cautious approach in response to resurging inflation, exchange rate volatility, seasonal liquidity pressures, and external uncertainties linked to geopolitical tensions. However, it cautioned that the effectiveness of monetary transmission is weakening significantly.
According to the review, headline inflation rose to 10.9 percent in April 2026 and further increased to 11.7 percent in May, while core inflation also edged upward, indicating that energy and supply-side shocks are increasingly feeding into broader price pressures across the economy.
ICMAP’s Monetary Policy Effectiveness Gap (MPEG) framework shows that inflationary and liquidity conditions are now outpacing the impact of earlier policy rate adjustments. The analysis highlights that from March 2025 onwards, monetary transmission has deteriorated sharply, with April and May 2026 recording deeply negative MPEG values of –16.4 and –19.8 percentage points respectively. The report attributes this weakness to persistent liquidity constraints, partly driven by the large informal economy operating outside the formal banking system.
The institute warned that any premature reduction in interest rates could further intensify inflationary pressures, stating that maintaining the current policy stance remains the most prudent short-term option under prevailing macroeconomic conditions.
However, ICMAP stressed that monetary policy alone cannot stabilise the economy. It called for sustained fiscal consolidation, expansion of the tax base, energy sector reforms, and stronger financial inclusion to improve policy transmission and restore macroeconomic stability.
The review also highlighted key macroeconomic indicators, noting that provisional GDP growth for FY26 stood at 3.7 percent. SBP foreign exchange reserves increased to $17.2 billion by June 5, 2026, with projections suggesting a rise to $18 billion by the end of June. The government also reported a primary surplus of 2.5 percent of GDP for FY26, with a target of 2.0 percent set for FY27.
ICMAP recommended maintaining a cautious monetary stance to allow lagged policy effects to fully transmit into the economy. It also urged closer monitoring of liquidity conditions during high cash-demand periods such as Eid and Muharram, improved coordination between fiscal and monetary authorities, and targeted supply-side interventions in energy, transport, and production inputs.
The institute further proposed institutionalising the MPEG framework as a monthly monitoring tool to better assess monetary transmission effectiveness over time.
Concluding its assessment, ICMAP said Pakistan’s monetary framework remains operational but persistent inflation and liquidity pressures are significantly weakening its effectiveness. It described the current policy stance as a “holding position” that provides time for deeper structural reforms in fiscal management, energy pricing, and financial inclusion to ensure long-term stability.
