Pakistan Monetary Policy has entered a critical phase after the Institute of Cost and Management Accountants of Pakistan (ICMA) warned that inflation, liquidity pressures and geopolitical uncertainty are undermining the effectiveness of interest rate decisions.
In its 24th Monetary Policy Statement Review, released after the State Bank of Pakistan’s Monetary Policy Committee decided to maintain the benchmark interest rate at 11.5 percent on June 15, 2026, ICMA said the country’s monetary transmission mechanism is under severe stress.
According to the institute, rising prices, exchange-rate volatility and uncertainty caused by the Middle East conflict are creating fresh risks for the economy. The report warns that conventional monetary tools are losing their effectiveness as large segments of economic activity remain outside the formal banking system.
Pakistan Monetary Policy Transmission Is Losing Strength
ICMA’s analysis revealed that the impact of previous interest rate measures has weakened considerably since March 2025. Through its Monetary Policy Effectiveness Gap framework, the institute found that inflationary and liquidity pressures are overpowering earlier policy actions.
April and May 2026 recorded deeply negative effectiveness readings of minus 16.4 and minus 19.8 percentage points respectively. These figures indicate that inflationary forces are spreading faster than monetary tightening can contain them.
Headline inflation surged to 10.9 percent in April and climbed further to 11.7 percent in May. Core inflation also moved higher, suggesting that rising energy costs and supply-side disruptions are feeding into broader price increases.
Why Cutting Interest Rates Could Backfire
ICMA cautioned that reducing interest rates at this stage could further fuel inflation. The institute believes maintaining the current rate is the safest short-term option available to policymakers.
However, it emphasized that monetary policy alone cannot stabilize Pakistan’s economy. Structural reforms are urgently needed to restore confidence and improve the effectiveness of future policy actions.
The institute called for stronger fiscal discipline, expansion of the tax net, reforms in the energy sector and wider financial inclusion to strengthen the country’s economic foundations.
Positive Economic Indicators Offer Some Relief
Despite the warning signs, several economic indicators showed improvement.
Pakistan’s provisional GDP growth for fiscal year 2026 was estimated at 3.7 percent. State Bank foreign exchange reserves increased to 17.2 billion dollars by June 5 and are expected to reach 18 billion dollars by the end of June.
Meanwhile, the government achieved a primary budget surplus of 2.5 percent of GDP during FY26, exceeding expectations. Authorities are targeting a primary surplus of 2 percent in FY27.
These gains provide some breathing space, but economists believe inflation remains the biggest challenge facing the economy.
ICMA Issues Key Recommendations for Pakistan Monetary Policy
ICMA urged policymakers to maintain a cautious approach and allow previous monetary measures sufficient time to produce results.
The institute also stressed the importance of monitoring liquidity during high-cash periods such as Eid and Muharram, when demand for currency rises sharply.
Better coordination between fiscal and monetary authorities was recommended to curb excess liquidity. ICMA also called for targeted interventions in the energy, transport and production sectors to address supply-side inflation.
Additionally, the institute proposed making the Monetary Policy Effectiveness Gap framework a permanent monthly monitoring tool to assess how effectively policy decisions are transmitted through the economy.
Pakistan Needs Deeper Reforms to Avoid Bigger Risks
ICMA concluded that Pakistan’s monetary system continues to function, but growing inflation and liquidity pressures are weakening its ability to influence economic activity.
The current interest rate policy, the institute said, should be viewed as a temporary holding strategy rather than a long-term solution.
Without reforms in fiscal management, energy pricing and financial inclusion, Pakistan Monetary Policy may struggle to deliver lasting economic stability, raising concerns that inflationary pressures could become even harder to control in the months ahead.