The State Bank of Pakistan (SBP) on Monday reduced its policy rate by 50 basis points to 10.5 per cent, effective from December 16.

In a statement, the monetary policy committee (MPC) noted that inflation remained within the 5-7pc target range on average during July-November FY26, though it said that core inflation proved to be “relatively sticky”.

“On balance, the inflation outlook remains broadly unchanged, mainly owing to the relatively benign global commodity prices and anchored inflation expectations, amidst [a] prudent monetary policy stance,” the statement read.

The MPC further observed that economic activity was increasing based on an improvement in key high-frequency indicators, including a higher-than-anticipated increase in large-scale manufacturing during the first quarter of the 2026 fiscal year.

“Nonetheless, the committee noted that the global environment remains challenging, particularly for exports, which may have some implications for the macroeconomic outlook,” the statement read.

“In this backdrop, while ensuring the ongoing price stability, the MPC noted the available space to reduce the policy rate to support sustainable economic growth.”

Additionally, the committee observed some developments since its last meeting in May, namely a rising unemployment rate from 2020-21, increasing foreign exchange reserves and “sizeable” debt repayments and increasing consumer confidence. It did note that business confidence “moderated slightly”.

“Led by sizable SBP profit transfer, the overall and primary fiscal balances recorded surpluses during Q1-FY26,” the statement read. “The global environment remains fluid, characterised by generally supportive commodity prices, but also evolving tariff-related dynamics and challenging financial conditions.”

The MPC added that high-frequency indicators support previous assessments of ongoing momentum in sectors, such as large-scale manufacturing. It further noted that the sale of automobiles, fertiliser, cement and the imports of machinery and intermediate goods, “all signal a positive outlook for industrial activity”.

On the other hand, the committee said that the ongoing challenging export environment poses some risks for industrial outlook.

“In the agriculture sector, incoming information about major crops also support the previous assessment,” the statement read. “The latest information on area under wheat crop, input conditions and government-backed incentive schemes indicates that wheat production may surpass the target.”

The MPC stated that these positive developments are likely to support the services sector and real GDP growth for FY26 is expected to remain in the upper half of the earlier projected range of 3.25–4.25pc.

In terms of the external sector, the MPC said that the current account posted a cumulative deficit of $0.7 billion during July-October FY26, in line with its expectations. Imports continued to grow with improving economic activity and workers’ remittances remained resilient.

“However, exports came under pressure, largely owing to a sharp decline in food exports, particularly rice,” the statement read.

“On the financing side, net inflows remained tepid. Despite this, SBP’s FX (foreign exchange) reserves have crossed the December 2025 target of $15.5bn, led by continued FX purchases by the central bank,” it added.

The statement added that changing trade dynamics may constrain Pakistan’s exports, while lower global oil prices may contain imports.

“On balance, the assessment for the current account is broadly unchanged, and the deficit is projected to remain within 0 to 1pc of GDP in FY26,” the MPC said. “Moreover, with the realisation of planned official inflows, SBP’s FX reserves are projected to strengthen to $17.8bn by June 2026.”

The MPC noted that in Q1-FY26, both the overall and primary balances recorded surpluses, thanks to the transfer of sizeable SBP profit.

“At the same time, the expenditure to GDP ratio remained lower than last year’s comparable level, which also contributed to this fiscal performance,” the statement read.

“Meanwhile, the FBR (Federal Board of Revenue) collection slowed down considerably to 10.2pc [year-on-year] during July-November FY26, implying significant acceleration required to achieve the budgeted tax collection target in the remaining seven months of FY26,” it added.

The committee further said that interest payments were expected to be lower than the budgeted amount for the year and help contain the fiscal deficit.

“The MPC underscored the importance of structural reforms, especially to broaden the tax base and privatise loss-making SOEs (state-owned enterprises), to strengthen fiscal buffers while creating space for public investment and needed spending for socioeconomic uplift,” the statement added.

According to the statement, since the committee’s last meeting, broad money growth accelerated to 14.9pc as of November 28. Due to borrowing by key sectors like textiles, wholesale and retail and chemicals, private sector credit ballooned by Rs187bn between July and November.

“Consumer financing, particularly automobile loans, remained strong in the wake of easing financial conditions, improved consumer sentiments and a stable macroeconomic environment,” the statement read.

“On the liability side, currency in circulation broadly remained unchanged, whereas an increase in deposits led to a moderate decline in the currency-to-deposits ratio.”

The MPC also observed that headline inflation remained within the medium-term target range over the past three months, with food, energy and core components of inflation beginning to converge.

“In this context, the prudent monetary policy stance, complemented by fiscal discipline, is helping stabilise inflation within the target range, despite recent supply-side frictions and relatively sticky core inflation,” the committee stated. “Moreover, inflation expectations also remain anchored.”

However, inflation is expected to rise past the target range towards the end of the current fiscal year, before reverting to base levels in FY2027.

“The committee noted that this outlook is subject to risks from volatile global commodity prices, magnitude and timing of energy price adjustments, fiscal slippages, and uncertainty around prices of wheat and allied products and perishable food items,” the statement added.

‘A welcome move’

In a statement from his office, Prime Minister Shehbaz Sharif expressed his satisfaction with the cut in interest rates, hailing the move as a “harbinger of … improvement of the business community and the common man”.

“By the grace of Allah, the hard work of the government’s economic team is bearing fruit, the PM said, praising Finance Minister Muhammad Aurangzeb and his team for their efforts.

“There is economic stability in the country and Pakistan is moving towards development,” he added. “The business community and the public have made sacrifices for economic stability. The economic improvement is providing relief to the public as much as possible.”

The PM said that small and medium-sized businesses will benefit the most from the reduction in interest rates and access to loans at low cost.

Yousuf M Farooq, the research director at Chase Securities, called the cut “a welcome move”, provided the current account stays contained and the exchange rate can act as a shock absorber if external pressures re-emerge.

“Lower rates should be supportive for equities by lifting valuation multiples and easing financing costs, particularly for leveraged sectors,” he told Dawn.

“It should also help stimulate domestic demand while reducing the government’s interest expense.”

Farooq noted that while a 50bps reduction is not material on its own, it clearly signals the direction of policy in the coming months.

Meanwhile, AKD Securities Research Director Avais Ashraf told Dawn that the slashed rate would improve domestic industry and make exports more competitive.

“We expect its impact on trade imbalance to remain manageable as food supplies improve,” he said.

Ashraf noted that the recent surge in trade balance was caused by a disruption in food supplies amid higher rains and floods in the monsoon season this year.

“Higher food imports and lower food exports exert pressure on [the] current account that remain manageable given robust remittances and manageable interest payments,” he stated.

Ashraf expressed concern over the growing import of automobiles, which is increasing despite government restrictions on financing terms.

Topline Securities wrote in an X post that the slashed policy rate was a “surprise”, as they expected the rates to remain unchanged.

“In last four monetary policy meetings, [the] SBP observed [the] status quo. [The] last cut of 100bps was announced in [a] May 5, 2025 meeting,” the post read.

The last reduction in the policy rate came in May. Since then, the benchmark rate has been held at 11pc, even as headline inflation dipped to 3pc earlier this year. November inflation was recorded at 6.1pc, compared to 6.2pc in October.

The International Monetary Fund (IMF) had advised maintaining tight liquidity to curb expected inflation, despite mounting industry pressure.

In a second review released on Thursday, the Fund said the monetary policy needed to remain “appropriately tight and data-dependent” to keep expectations anchored, while noting that the SBP had maintained positive real interest rates on a forward-looking basis.

It said the tight stance had been pivotal in reducing inflation and should be maintained to ensure price stability and support the rebuilding of external buffers.

Industrial leaders had previously called for a reduction in interest rates to help them stay competitive globally.