• Surprises market by cutting policy rate 50bps to 10.5pc
• Inflation expected to rise above target in FY26 before easing in FY27
• Real GDP growth in FY26 projected at 3.25-4.25pc, up from 3pc in FY25
• State Bank reserves estimated to reach $17.8bn by June 2026

KARACHI: Despite persistent inflationary pressures and sticky core prices, the State Bank of Pakistan on Monday opted for a measured 50 basis point reduction in the policy rate, surprising analysts who had expected no change and falling short of industry demands for a sharper cut.

The SBP’s Monetary Policy Committee (MPC) decided to reduce the policy rate by 50 basis points to 10.5 per cent, effective Dec 16.

Polls conducted by research houses had largely predicted no change in the policy rate, failing to anticipate the shift within the central bank. However, trade and industry had been pressing for a 100bps cut in the interest rate, which had remained unchanged since May 2025.

“The MPC continues to expect that inflation may rise above its target range towards the end of FY26 due to a low base effect from last year, before reverting to the target range in FY27,” the MPC said in its statement.

It added that inflation, on average, remained within the 5-7 per cent target range during July-November FY26, although core inflation was proving to be relatively sticky.

Exporters had been at the forefront of calls for a rate cut, arguing that lower borrowing costs were needed to make Pakistani products more competitive in international markets.

“The global environment remains challenging, particularly for exports, which may have some implications for the macroeconomic outlook. Against this backdrop, while ensuring ongoing price stability, the MPC noted available space to reduce the policy rate to support sustainable economic growth,” the statement said.

Beyond exports, the overall economic growth has been under stress for levels. “The Labour Force Survey 2024-25 points to an increase in the unemployment rate compared to 2020-21, notwithstanding faster growth in employment compared to the previous survey,” the SBP noted.

The central bank said real GDP growth for the current fiscal year (FY26) is expected to remain in the upper half of the projected range of 3.25-4.25pc, compared with a revised growth rate of about 3pc in FY25.

The MPC said economic activity continues to gain traction, supported by robust improvement in key high-frequency indicators, including a higher-than-anticipated increase in large-scale manufacturing (LSM) during the first quarter (Q1) of FY26.

It also cited several key developments since the last meeting, including an increase in foreign exch­ange reserves to $15.8 billion, improved consumer confidence, a fiscal surplus in Q1FY26, and a generally supportive global environment for commodity prices.

Real sector

The SBP said industrial performance remains stro­ng, with LSM registering 4.1pc year-on-year growth in Q1FY26, with most sectors posting output gains.

Sales of automobiles, fertiliser and cement, along with imp­orts of machinery and intermediate goods, point to a positive outlook for industrial activity.

How­ever, the challenging global export environment poses some risks, it cautioned. In agriculture, incoming data on major crops supports the earlier assessment.

External sector

Exports came under pressure, largely due to a sharp decline in food exports, particularly rice. On the financing side, net inflows remained tepid. “Despite this, SBP’s foreign exchange reserves have crossed the Dece­mber 2025 target of $15.5bn, led by continued FX purchases by the central bank,” the MPC said.

The assessment for the current account remains broadly unchanged, with the deficit projected to stay within 0-1pc of GDP in FY26. The MPC projected SBP’s FX reserves to reach $17.8bn by June 2026.

Fiscal sector

In Q1FY26, both overall and primary fiscal balances recorded surpluses, driven mainly by the transfer of sizeable SBP profits.

The expenditure-to-GDP ratio also remained lower than the corresponding period last year, supporting fiscal performance.

Interest payments are expected to remain below budgeted levels for the full year, which could help contain the fiscal deficit. However, achieving the targeted primary surplus may remain challenging, the SBP cautioned.

Money and credit

Since the last MPC meeting, broad money (M2) growth accelerated to 14.9pc as of Nov 28, driven by increased net budgetary borrowing from the banking system.

Private sector credit expanded by Rs187bn during July-November, led by borrowing from sectors such as textiles, wholesale and retail trade, and chemicals. Consumer financing, particularly auto loans, rem­ained strong amid easing financial conditions, imp­roved consumer sentiment and macroeconomic stability.

However, on a year-on-year basis, private sector credit was down 0.3pc.

Inflation

The MPC noted that headline inflation has rem­ained within the medium-term target range over the past three months, with food, energy and core inflation converging broadly in line with expectations.

“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 SBP said.

However, the committee cautioned that the outlook remains subject to risks from volatile global commodity prices, the timing and magnitude of energy price adjustments, potential fiscal slippages, and uncertainty over wheat and other perishable food prices.

Published in Dawn, December 16th, 2025