ICMA says inflation and liquidity pressures are weakening monetary policy impact

KARACHI: The Institute of Cost and Management Accountants of Pakistan (ICMA) has released the 24th edition of its monetary policy statement review after the State Bank of Pakistan (SBP) decided to keep the policy rate unchanged at 11.50%.

According to ICMA, the central bank decision reflects growing concerns about rising inflation, exchange rate fluctuations, seasonal cash demand, and uncertainty caused by the ongoing Middle East conflict. The Institute said these factors are putting pressure on Pakistan’s monetary system and reducing the effectiveness of policy measures.

Inflation increased sharply in recent months. Headline inflation rose to 10.9 percent in April and 11.7 percent in May 2026. Core inflation also moved higher. ICMA said this shows that higher energy costs and supply side challenges are spreading across the economy and pushing prices up.

Using its Monetary Policy Effectiveness Gap (MPEG) framework, ICMA found that monetary policy transmission has weakened since March 2025. The Institute noted that inflation and liquidity pressures are growing faster than the impact of previous interest rate decisions.

MPEG values fell to negative 16.4 percentage points in April and negative 19.8 percentage points in May 2026. ICMA said this reflects strong liquidity pressures, as a large part of the economy still operates outside the formal banking system.

The Institute warned that reducing interest rates at this stage could increase inflation. It said keeping the policy rate unchanged is the most suitable short-term option.

However, ICMA stressed that monetary policy alone cannot ensure economic stability. It called for fiscal reforms, a broader tax base, energy sector improvements, and stronger financial inclusion to support long-term economic growth.

The review also highlighted several positive economic indicators. Pakistan provisional GDP growth for FY26 was estimated at 3.7%. SBP foreign exchange reserves increased to $17.2 billion by June 5, 2026, and are expected to reach $18 billion by the end of June. The government also reported a primary surplus of 2.5% of GDP in FY26 and has set a target of 2.0% for FY27.

ICMA recommended maintaining a cautious monetary policy to allow previous decisions to have a greater impact. It also urged stronger monitoring of liquidity during periods of high cash demand, such as Eid and Muharram.

The Institute called for better coordination between fiscal and monetary authorities to reduce excess liquidity in the economy. It also supported targeted measures to address challenges in energy, transport, and production costs.

The Institute further recommended making the MPEG framework a regular monthly tool to monitor the effectiveness of monetary policy. ICMA concluded that Pakistan monetary system remains operational, but inflation and liquidity pressures are weakening policy transmission.

It said the current policy stance should provide time for deeper reforms in fiscal management, energy pricing, and financial inclusion to improve the overall effectiveness of monetary policy.