THE State Bank has surprised the market by slashing its policy rate by 50 basis points to 10.5pc. The move is underpinned by its assessment that the inflation outlook remains broadly unchanged. Benign global commodity prices and well-anchored inflation expectations, supported by a prudent monetary policy stance, have provided the necessary ‘space’ for easing.

Most financial analysts had, however, pushed back rate-cut forecasts to the later part of the second half of FY26 following the IMF’s warning that inflation risks persisted and policy must stay “appropriately tight and data-dependent” to keep expectations anchored. The Fund expects inflation here to temporarily accelerate 8-10pc — above the SBP target range of 5-7pc — this fiscal before stabilising. In the second review of its $7bn facility, the lender had stated that the tight stance had been pivotal in reducing inflation and should be maintained to ensure price stability and support the rebuilding of external buffers.

The SBP held its policy rate unchanged at 11pc for nearly seven months, after cutting it by 1,100bps between June 2024 and May 2025 as inflation fell sharply from a record high of over 38pc in 2023. The rate cut comes after the national coordinator of the SIFC had called for a reduction in borrowing costs to reflect the true picture of inflation to boost investment in the economy and accelerate growth.

The bank has also been under pressure from various business lobbies for rapid monetary easing to boost growth that has averaged 1.8pc in the last three years, with the manufacturing sector struggling. Recent unemployment data has given further impetus to the demand as labour force growth (3.9pc) has outpaced job creation (3.7pc).

In its monetary policy statement, the bank, which expects GDP growth for FY26 to remain in the upper half of the projected range of 3.25-4.25pc, despite flood losses, noted the availability of space to reduce the policy rate to support sustainable economic growth. Though the rate-cut shows SBP’s confidence in the current economic trajectory, the meagre reduction means it still wishes to move cautiously rather than going for full-throttle growth as some lobbies want it to. Even if the move signals a strategic shift while attempting to balance the need to support a struggling economy with the imperative to maintain recently achieved macro-stability, the rate cut is too small to make a significant impact.

Indeed, the elevated rates are a major factor discouraging new investment. But they are far from the only reason for weak private investment in the country in recent years. Structural issues, such as punitive tax rates, high energy costs, policy inconsistency and the government’s own budget constraints, have played an even bigger part in depressing investment and growth. Without broader fiscal, governance and business reforms, even a substantial rate cut is unlikely to rev up growth prospects.

Published in Dawn, December 17th, 2025