SBP Reduces Policy Rate to 10.5% to support Economic Growth
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The State Bank of Pakistan (SBP) announced a 50 basis point reduction in its policy rate, bringing it down to 10.5% effective December 16th. This decision, made by the monetary policy committee (MPC), comes as inflation remains within the 5-7% target range on average during July-November FY26, although core inflation has proven “relatively sticky”.
The MPC cited benign global commodity prices and anchored inflation expectations, alongside a prudent monetary policy, as key factors supporting a stable inflation outlook. Furthermore, the committee observed increasing economic activity, evidenced by a higher-than-anticipated rise in large-scale manufacturing during the first quarter of the 2026 fiscal year.
Despite positive domestic indicators, the MPC acknowledged a challenging global habitat, particularly concerning exports, which could impact the macroeconomic outlook. This led the committee to conclude there was “space to reduce the policy rate to support sustainable economic growth” while maintaining price stability.
Several developments as the last meeting in May influenced the decision, including a rising unemployment rate, increasing foreign exchange reserves exceeding the December 2025 target of $15.5 billion, sizeable debt repayments, and growing consumer confidence. Fiscal balances also recorded surpluses during Q1-FY26,driven by SBP profit transfers.
High-frequency indicators point to continued momentum in sectors like large-scale manufacturing, with positive signals from automobile, fertiliser, cement sales, and imports of machinery and intermediate goods. However, the challenging export environment remains a risk. the agriculture sector also shows promise, with wheat production potentially surpassing targets.
Consequently, the SBP projects real GDP growth for FY26 to remain in the upper half of the previously projected range of 3.25-4.25%.
The current account posted a cumulative deficit of $0.7 billion during July-October FY26, aligning with expectations. While imports are growing with economic activity and remittances remain resilient, exports have faced pressure, particularly in the food sector, notably rice.
The MPC projects the current account deficit to remain within 0 to 1% of GDP in FY26, contingent on the realization of planned official inflows, and anticipates continued FX reserve growth. Changing trade dynamics and lower global oil prices are expected to influence import and export trends.
Pakistan Central Bank Holds steady on Interest Rates Amid Inflation Concerns
Pakistan’s State Bank of Pakistan (SBP) has maintained its key policy rate at 11%, despite a recent dip in inflation, citing the need to maintain price stability and rebuild external buffers. This decision comes as industry leaders continue to call for rate cuts to boost competitiveness.
Recent Inflation Trends & Policy Rate History
The last reduction in the policy rate occured in May. Sence then, the SBP has held the benchmark rate steady, even as headline inflation decreased to 3% earlier in the year. Most recently, november’s inflation rate was recorded at 6.1%, a slight decrease from October’s 6.2% Dawn.
IMF Recommendations & concerns
The International Monetary Fund (IMF) has consistently advised maintaining tight liquidity to manage inflationary expectations. In a recent review released on Thursday, the IMF emphasized the need for a monetary policy that remains “appropriately tight and data-dependent” to anchor expectations. The IMF acknowledged the SBP’s success in maintaining positive real interest rates Dawn. the IMF believes this tight monetary stance has been crucial in reducing inflation and is vital for ensuring price stability and strengthening Pakistan’s external financial position.
Industry Pressure for Rate Cuts
Pakistani industrial leaders have been vocal in their calls for a reduction in interest rates. They argue that lower rates are necessary to enhance their competitiveness in the global market Dawn. However, the SBP appears to be prioritizing the IMF’s recommendations and the need to control inflation.
Key Takeaways
* Policy Rate: The SBP’s policy rate remains at 11%.
* Inflation: While inflation has decreased, it remains a concern for the SBP and the IMF. november inflation was 6.1%.
* IMF Influence: The IMF continues to advocate for tight monetary policy in Pakistan.
* Industry Concerns: Pakistani industries are pushing for lower interest rates to improve competitiveness.
Looking ahead
The SBP is expected to continue monitoring inflation data closely and remain cautious about easing monetary policy. The balance between supporting economic growth and maintaining price stability will be a key challenge for the central bank in the coming months. The next policy rate announcement will be closely watched for signals about the future direction of monetary policy in Pakistan.