The State Bank of Pakistan (SBP) on Monday cut its benchmark policy rate by 50 basis points, citing inflation that remains within target and signs of strengthening economic activity, while acknowledging the risks posed to exports by prevailing global conditions.
In a statement issued after the Monetary Policy Committee (MPC)’s last meeting of 2025, the central bank said the rate cut—from 11% to 10.5%—would take effect from Dec. 16. It noted that headline inflation had averaged within the target range of 5-7% from July through November, adding core inflation remained “relatively sticky.”
The MPC said the inflation outlook remains broadly unchanged, helped by subdued global commodity prices and anchored inflation expectations under a prudent policy stance. At the same time, economic activity is gaining traction, supported by improving high-frequency indicators and stronger-than-expected growth in large-scale manufacturing in the first quarter of FY26. “While ensuring ongoing price stability, the MPC noted the available space to reduce the policy rate to support sustainable economic growth,” read the statement.
It said that since the MPC’s last meeting, a Labor Force Survey had found that unemployment had risen compared with 2020–21 despite faster employment growth. Foreign exchange reserves have climbed above $15.8 billion, aided by a $1.2 billion disbursement from the International Monetary Fund (IMF) following successful reviews under the ongoing Extended Fund Facility and Resilience and Sustainability Facility. Consumer confidence has improved, while business confidence remaining positive. Fiscal balances posted surpluses in the first quarter, largely due to a sizable profit transfer from the central bank.
The MPC said the real policy rate remains “adequately positive” to stabilize inflation over the medium term and emphasized the need for coordinated monetary and fiscal policies alongside structural reforms to lift long-term growth.
In the real economy, industrial output remained strong, with large-scale manufacturing growing 4.1% year-on-year in the first quarter and most sectors expanding. Sales of automobiles, fertilizer and cement, along with higher imports of machinery and intermediate goods, point to continued momentum, though a challenging export environment poses risks. In agriculture, wheat production is expected to exceed targets, supported by favorable acreage, input conditions and government incentives. Overall, the central bank expects real GDP growth in FY26 to land in the upper half of its projected 3.25% to 4.25% range.
On the external front, the current account recorded a $0.7 billion deficit from July through October, in line with expectations. Imports rose with economic activity and remittances stayed resilient, but exports weakened, driven by a sharp drop in food shipments, particularly rice. Despite modest financing inflows, reserves surpassed the December target of $15.5 billion. The current account deficit is projected to remain between 0-1% of GDP in FY26, with reserves seen rising to $17.8 billion by June 2026, assuming planned official inflows materialize.
Fiscal performance improved in the first quarter, with both overall and primary balances in surplus and a lower expenditure-to-GDP ratio than a year earlier. However, tax collection growth slowed to 10.2% year-on-year through November, signaling pressure to meet full-year targets. While lower interest payments may help contain the deficit, the central bank warned that achieving the targeted primary surplus would be challenging and called for reforms to broaden the tax base and privatize loss-making state-owned enterprises.
Money supply growth accelerated to 14.9% by late November, driven by higher government borrowing from banks. Private sector credit rose by Rs. 187 billion from July to November, led by textiles, wholesale and retail, and chemicals, while consumer lending—especially auto loans—remained strong. Year-on-year private credit growth dipped slightly due to base effects.
Inflation has stayed within the target range for the past three months, with food, energy and core components converging as expected. The central bank cautioned, however, that inflation could rise above target toward the end of FY26 due to base effects before easing back in FY27, with risks stemming from global commodity volatility, energy price adjustments, fiscal slippage and uncertainty around food prices.