SBP keeps policy rate unchanged at 10.5%

January 26, 2026 (MLN):  The State Bank of Pakistan (SBP) on Monday kept its key policy rate unchanged at 10.5% with effect from  January 27, 2026.

The decision was taken by the Monetary Policy Committee (MPC) at its scheduled meeting, which is inconsistent with the market sentiments, as analysts  predicted that SBP could  reduce it by 75-50bps.

Headline inflation stood at 5.6% year-on-year in December 2025, aligning with the central bank’s expectations and remaining within the target range.

Although core inflation has stabilized at a relatively higher level of around 7.4%, easing inflation expectations among consumers and businesses signal improving confidence in macroeconomic stability.

Recent high-frequency indicators point to a faster-than-anticipated pickup in economic activity, led largely by domestic-oriented sectors.

Manufacturing, construction, and consumer demand have all shown notable strength, reinforcing the MPC’s assessment that growth momentum is becoming more broad-based and resilient.

While the trade deficit widened due to a surge in imports and softer export performance, particularly in food items such as rice, the overall current account deficit has remained manageable.

Strong workers’ remittances, growing ICT services exports, and favorable global commodity prices have played a key role in cushioning external pressures.

As a result, foreign exchange reserves rose to $16.1 billion by mid-January, exceeding earlier targets and supported by continued interbank market purchases by the SBP.

Against this backdrop, the MPC noted that its outlook for inflation and the external account remains largely unchanged, while the growth outlook has improved significantly. The Committee therefore judged it prudent to keep the policy rate unchanged to consolidate economic gains and ensure sustainable growth.

Economic Activity Gains Pace

Provisional data shows that real GDP grew by 3.7% year-on-year in Q1-FY26, a sharp improvement from 1.6% in the same period last year. Growth was driven mainly by strong performance in the industrial and agricultural sectors, with momentum continuing into the second quarter.

Large-scale manufacturing recorded robust growth of 8.0% in October and 10.4% in November 2025, lifting cumulative LSM growth to 6.0% during July–November FY26.

Rising auto sales, cement dispatches, fertilizer off-take, POL sales (excluding furnace oil), and increased imports of machinery and intermediate goods all point to sustained domestic demand. Encouraging indicators for the wheat crop further support optimism, with positive spillovers expected for the services sector.

In light of these developments, the MPC has upgraded its GDP growth projection for FY26 to 3.75–4.75%, with growth expected to strengthen further in FY27 as the impact of earlier policy easing and improved macroeconomic stability continues to unfold.

External Sector Outlook Remains Stable

The current account posted a $244 million deficit in December 2025, bringing the cumulative deficit to $1.2 billion in the first half of FY26. Despite pressures from higher imports, sustained remittance inflows and resilient high-value-added textile exports have helped keep external balances under control.

Looking ahead, the SBP expects the current account deficit to remain contained within 0–1% of GDP in FY26.

With planned official inflows and continued remittance growth, foreign exchange reserves are projected to exceed $18 billion by June 2026 and move closer to the benchmark of three months of import cover in FY27, although global trade fragmentation and geopolitical uncertainty remain key risks.

Fiscal and Monetary Conditions Support Stability

On the fiscal side, FBR revenues grew by 9.5% in H1-FY26, though below target, resulting in a shortfall.

However, lower interest payments and restrained expenditures have contributed to an improved fiscal balance, supporting overall macroeconomic stability.

The MPC emphasized the importance of sustaining fiscal discipline through structural reforms, including tax base expansion and SOE privatization, to support long-term growth.

Meanwhile, monetary conditions have eased. Broad money growth rose to 16.3%, supported by increased private sector credit and government borrowing.

To further encourage lending, the SBP reduced the average cash reserve requirement from 6.0% to 5.0%, which is expected to provide an additional boost to private sector activity.

Inflation Outlook Remains Favorable

Headline inflation has moderated due to easing food prices, while energy inflation edged up following the fading of favorable base effects. Despite persistent core inflation, the MPC expects overall inflation to remain within the 5–7% target range in FY26 and FY27, with only temporary upward pressures in the near term.

Overall, the MPC reaffirmed that a positive real policy rate, combined with coordinated fiscal policy and productivity-enhancing reforms, will be critical to sustaining economic growth, boosting exports, and maintaining macroeconomic stability over the medium term.

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