The State Bank of Pakistan (SBP) on Monday decided against changing the interest rate and announced maintaining it at the existing 10.5%, defying market expectations.
Addressing a press conference in Karachi, SBP Governor Jameel Ahmed said the policy rate would remain unchanged for the next two months.
An analyst at Topline Securities said that the MPC’s announcement came as a surprise as majority of the participants were expecting a rate cut.
In a statement, the SBP said its Monetary Policy Committee (MPC) observed headline inflation of 5.6% year-on-year in December 2025 was in line with its expectation.
“However, core inflation has steadied around a relatively higher level of 7.4% in recent months. Meanwhile, as reflected by the recent high frequency indicators (HFIs), including large-scale manufacturing (LSM), economic activity continues to gain momentum faster than anticipated, mainly led by domestic-oriented sectors,” it added.
The MPC noted an increase in the trade deficit in the wake of a substantial rise in imports, particularly in import volumes, and a decline in exports.
However, resilient workers’ remittances and benign global commodity prices helped keep the current account deficit relatively contained.
“In this backdrop, the MPC noted that the outlooks for inflation and the current account are broadly unchanged from its previous assessment, while the outlook for economic growth has improved significantly,” the SBP said.
Based on this, the MPC deemed it prudent to hold the policy rate unchanged at the current level to ensure price stability and support sustainable economic growth.
Macroeconomic indicators
Real GDP grew by 3.7% year-on-year in the first quarter of fiscal year 2026 as compared to 1.6% in the corresponding period last year, indicating a notable pickup in economic activity.
Moreover, recent outturns of HFIs suggested that momentum continued in the second quarter of the current fiscal year.
Auto sales, domestic cement dispatches, petroleum products sales (excluding furnace oil), fertiliser off-take, and imports of machinery and intermediate goods recorded notable growth, suggesting sustained domestic demand.
LSM posted a growth of 8% year-on-year and 10.4% year-on-year in October and November 2025, respectively, raising cumulative LSM growth to 6% during July-November FY26.
In the agriculture sector, the latest information on sowing and satellite imagery points towards encouraging prospects for the wheat crop.
According to the SBP, the growth outlook has substantially improved from the earlier assessment, and real GDP growth is now projected in the range of 3.75% to 4.75% in FY26, with the economic momentum likely to strengthen further in FY27.
The external current account registered a deficit of $244 million in December 2025, leading to a cumulative deficit of $1.2 billion during the first quarter of FY26.
“Going forward, continued uptick in workers’ remittances and supportive global commodity prices are assessed to contain the current account deficit in the range of 0 to 1% of GDP in FY26,” the SBP stated.
The central bank’s foreign exchange reserves are expected to surpass $18 billion by June 2026 and rise further in FY27.
Federal Board of Revenue (FBR) tax revenues grew by 9.5% in the first half of FY26 as compared to 26% in the same period last year.
This growth was lower than the target, resulting in a shortfall of Rs329 billion, indicating a significant acceleration in growth would be required in the second half.
Since the last MPC meeting, broad money (M2) growth accelerated to 16.3% by January 9, primarily driven by a rise in private sector credit and government borrowing.
Private sector credit expanded by Rs578 billion during FY26 (till January 9) amidst easing financial conditions. The major borrowers included key sectors, such as textiles, wholesale and retail trade, and chemicals.
Further, the SBP has decided to reduce the average Cash Reserve Requirement for banks from 6% to 5% that is expected to increase the private sector credit.
Headline inflation eased to 5.6% in December from 6.1% in November amidst a moderation in food prices, notwithstanding the sharp uptick in wheat and allied product prices.
Meanwhile, energy inflation increased, mainly due to fading of favourable base effect in electricity tariffs.
At the same time, the MPC noted that after declining steadily during FY25, core inflation has persisted at around 7.4% in the first half of FY26.
On balance, the MPC projected inflation to stabilise within the target range of 5% to 7% in FY26 and FY27, after temporarily exceeding the upper bound for a few months during this calendar year.
