The State Bank of Pakistan (SBP)’s Monetary Policy Committee on Monday decided to keep the policy rate unchanged at 10.5%, disappointing industry observers who have been calling for a reduction to the single digits in light of curtailed inflation.
In a statement, the central bank said the MPC had kept the interest rate unchanged as the outlook for inflation and the current account has remained stagnant. It noted that while headline inflation of 5.6% in December was in line with expectations, core inflation had steadied around a relatively higher level of 7.4%. “Meanwhile, as reflected by the recent high frequency indicators, including large-scale manufacturing, economic activity continues to gain momentum faster than anticipated, mainly led by domestic-oriented sectors,” it said, adding the trade deficit had widened due to increasing imports and declining exports.
“Nonetheless, based on the resilient workers’ remittances and benign global commodity prices, the current account deficit remained relatively contained,” it said, adding prevailing conditions had “significantly” improved the outlook for economic growth. “Based on this, the Committee deemed it prudent to hold the policy rate unchanged at the current level to ensure price stability and support sustainable economic growth,” it added.
According to the statement, the MPC noted that real GDP growth was provisionally reported at 3.7% year-on-year for the first quarter of the ongoing fiscal year, mainly led by the industry and agriculture sectors. Further, it said both consumer and business confidence had improved, while the SBP’s foreign exchange reserves had surpassed the end-December target, reaching $16.1 billion. It also noted that the Federal Board of Revenue (FBR)’s revenue growth had decelerated to 7.3% in December, missing its target, while the IMF had slightly upgraded its global growth forecast for 2026.
In view of this, read the statement, the MPC assessed the real policy rate to be adequately positive to stabilize inflation within the target range of 5-7% over the medium term. It also emphasized the need to boost exports and achieve high growth on a sustainable basis.
In the “real sector,” the MPC noted growth in auto sales, domestic cement dispatches, POL sales, fertilizer off-take, and imports of machinery and intermediate goods. Consistent with this trend, it said large-scale manufacturing had posted a growth of 8% year-on-year and 10.4% year-on-year in October and November 2025, respectively. Similarly, it said, latest data suggested “encouraging prospects” for the wheat crop. It said the improving indicators had improved the growth outlook into the range of 3.75-4.75% in FY26. “This economic momentum is likely to strengthen further in FY27, supported by the still-unfolding impact of the earlier reduction in the policy rate and ongoing macroeconomic stability,” it said.
On the external front, the current account posted a deficit of $244 million in December, taking the cumulative shortfall to $1.2 billion in the first half of the ongoing fiscal year. The central bank said foreign exchange reserves rose to $16.1 billion as of Jan. 16, aided by interbank purchases, and are expected to exceed $18 billion by June, assuming planned official inflows materialize.
Fiscal pressures remain a concern, per the MPC. Tax revenues grew 9.5% in the first half of the fiscal year, well below target, resulting in a shortfall of Rs. 329 billion. While lower interest payments have helped contain the fiscal deficit, the central bank said achieving the primary surplus target will be challenging without broader tax reforms and progress on privatizing loss-making state-owned enterprises.
The central bank also said broad money growth has picked up, driven by rising private sector credit and government borrowing. To support lending, it announced a reduction in the average cash reserve requirement for banks to 5% from 6%.
Inflation is expected to remain within the 5% to 7% target range in fiscal 2026 and 2027, though the outlook is subject to risks from volatile commodity prices, energy tariff adjustments and stronger-than-expected domestic demand, the central bank added.