The State Bank of Pakistan (SBP) on Monday maintained its key policy rate at 10.5 per cent.

Brokerage house Topline Securities noted that this “came as a surprise” as a majority of their participants were expecting a rate cut.

According to the Monetary Policy Statement released after a meeting of the SBP’s Monetary Policy Committee (MPC), while headline inflation was 5.6pc in December 2025, core inflation steadied around a higher level of 7.4pc.

The external current account posted a deficit of $244 million in December 2025, leading to a $1.2 billion deficit during the first half of FY2026. Weak exports were driven by a sharp drop in food exports, particularly rice, while high-value-added (HVA) textile exports remained resilient. However, sustained growth in workers’ remittances and ICT services helped in containing the current account deficit.

As a result of this, the MPC noted that inflation and the current account were broadly unchanged, while the outlook for economic growth had improved. Based on this, the committee believed it prudent to hold the policy rate unchanged at the current level to ensure price stability and sustainable economic growth.

Since its last meeting, the committee noted that real GDP growth was provisionally reported at 3.7pc year on year for the first quarter of the FY2026, led by the industry and agriculture sectors. Auto sales, domestic cement dispatches, petroleum, oil and lubricant (POL) sales (excluding furnace oil), fertiliser off-take, and imports of machinery and intermediate goods recorded notable growth, suggesting sustained domestic demand.

Large-scale manufacturing (LSM) posted growth of 8pc year on year and 10.4pc year on year in October and November 2025, raising LSM growth to 6pc during July-November FY2026, according to the committee’s findings. Their findings also posted that the latest information in agriculture pointed to encouraging prospects for the wheat crop. These favourable developments in the commodity-producing sectors were expected to provide further energy to the services sector.

The MPC noted that this improved upon earlier estimates of GDP growth, now projecting it in the range of 3.75-4.75pc for FY2026, expecting this momentum to strengthen further in FY2027, supported by the earlier reduction in the policy rate.

It also noted that consumer and business confidence improved, and inflation expectations of these stakeholders eased. Furthermore, the SBP’s forex reserves surpassed the end-December target, reaching $16.1bn as of January 16, led by the SBP’s ongoing forex purchases.

Looking forward, the MPC noted that the continued uptick in worker remittances and supportive global commodity prices were expected to contain the current account in the range of zero to 1pc of the GDP in FY2026. Based on this and official inflows, the SBP’s forex reserves were expected to surpass $18bn by June 2026 and rise further in FY2027, nearing the 3-month import cover benchmark. However, the committee noted that this outcome was susceptible to some major risks from global trade fragmentation and geopolitical uncertainty.

It said the Federal Board of Revenue’s tax revenues grew by only 9.5pc, well below last year’s pace of 26pc and the annual target, resulting in a shortfall of Rs329bn. This implied a steep revenue acceleration would be needed in the second half of FY2026. Contained expenditures, particularly lower interest payments, had helped improve the overall fiscal balance and support the full-year fiscal deficit target, it said.

However, achieving the annual primary surplus target remained challenging, underscoring the need for sustained fiscal consolidation and discipline for the economy to grow on a sustainable basis, it added.

Since the last MPC meeting, broad money grew to 16.3pc by early January, driven by stronger private sector credit and government borrowing.

Private credit expanded by Rs578bn during FY2026 (till January 9), with textiles, wholesale and retail trade, chemicals, and consumer financing leading.

The committee also noted that the International Monetary Fund (IMF) had slightly upgraded Pakistan’s global growth forecast for FY2026, while highlighting risks from elevated global tariff uncertainty and volatile commodity prices.

Due to these developments, the MPC maintained the real policy rate to stabilise inflation within the target range of 5 to 7pc over the medium term. The committee also emphasised the need for a coordinated and prudent monetary and fiscal policy mix, along with structural reforms to enhance productivity, to increase exports, and achieve high growth on a sustainable basis.

During the last MPC meeting, the central bank had revised its benchmark rate to 10.5pc, a 50-basis-point reduction, noting that inflation remained within the 5-7 per cent target range on average during July-November of the 2026 fiscal year, though it said core inflation proved relatively sticky.