The State Bank of Pakistan (SBP) on Monday decided to keep its benchmark policy rate unchanged at 10.5 per cent, defying market expectations of a cut.
According to brokerage firm Topline Securities, the decision came as a surprise, as most market participants had anticipated an easing of monetary policy.
In its Monetary Policy Statement issued after a meeting of the Monetary Policy Committee (MPC), the central bank noted that while headline inflation eased to 5.6 per cent in December 2025, core inflation remained elevated at around 7.4 per cent, prompting caution.
On the external front, the current account recorded a deficit of $244 million in December 2025, bringing the cumulative deficit for the first half of FY2026 to $1.2 billion. Exports weakened mainly due to a sharp decline in food shipments, particularly rice, although high-value-added textile exports showed resilience. Strong growth in workers’ remittances and ICT services, however, helped contain external pressures.
Taking these factors into account, the MPC observed that inflation and the current account position had remained broadly stable, while the outlook for economic growth had improved. It therefore deemed it prudent to maintain the policy rate at its current level to safeguard price stability and support sustainable growth.
The committee noted that provisional real GDP growth stood at 3.7 per cent year-on-year in the first quarter of FY2026, driven by stronger performance in the industrial and agricultural sectors. Indicators such as auto sales, cement dispatches, petroleum and lubricant sales (excluding furnace oil), fertiliser offtake, and imports of machinery and intermediate goods also posted notable gains, signalling sustained domestic demand.
Large-scale manufacturing (LSM) grew by 8 per cent and 10.4 per cent year-on-year in October and November 2025, respectively, lifting cumulative LSM growth to 6 per cent during July–November FY2026. The MPC also cited encouraging prospects for the wheat crop, noting that improved performance in commodity-producing sectors was expected to provide further momentum to services activity.
Reflecting these developments, the SBP revised its GDP growth projection upward to a range of 3.75–4.75 per cent for FY2026, with expectations that growth momentum would strengthen further in FY2027, supported by earlier reductions in the policy rate.
The MPC also highlighted improvements in consumer and business confidence, alongside easing inflation expectations. SBP’s foreign exchange reserves exceeded the end-December target, reaching $16.1 billion as of January 16, largely due to continued forex purchases by the central bank.
Looking ahead, the committee projected that rising workers’ remittances and favourable global commodity prices would help contain the current account balance within zero to 1 per cent of GDP in FY2026. On the back of official inflows, SBP reserves were expected to surpass $18 billion by June 2026 and continue rising in FY2027, approaching the three-month import cover benchmark. However, it cautioned that these projections were vulnerable to risks stemming from global trade fragmentation and geopolitical uncertainty.
On the fiscal side, the MPC noted that Federal Board of Revenue (FBR) tax revenues grew by only 9.5 per cent, significantly below last year’s growth of 26 per cent and the annual target, resulting in a shortfall of Rs329 billion. While contained expenditures—particularly lower interest payments—helped improve the overall fiscal balance, achieving the annual primary surplus target remained challenging.
Since the last MPC meeting, broad money growth accelerated to 16.3 per cent by early January, driven by stronger private sector credit and government borrowing. Private sector credit expanded by Rs578 billion during FY2026 up to January 9, led by textiles, wholesale and retail trade, chemicals, and consumer financing.
The committee also took note of the International Monetary Fund’s marginal upgrade to Pakistan’s global growth outlook for FY2026, while flagging risks arising from tariff uncertainty and volatile commodity prices.
Given these dynamics, the MPC opted to maintain a sufficiently positive real policy rate to anchor inflation within the medium-term target range of 5–7 per cent. It reiterated the need for a coordinated monetary and fiscal policy stance, alongside structural reforms aimed at boosting productivity, expanding exports, and achieving durable economic growth.
At its previous meeting, the SBP had reduced the policy rate by 50 basis points to 10.5 per cent, citing inflation trends within the target range, even as core inflation remained relatively sticky.