SBP Cuts Interest Rate for First Time in 5 Sessions

The State Bank of Pakistan (SBP) has cut the policy rate by 50 basis points to 10.5 percent in today’s monetary policy meeting, according to its latest monetary policy meeting on Monday. The central bank cited contained inflation and improving economic activity. The move marks the first rate cut in the current cycle, as headline inflation averaged within the 5-7% target range during July-November FY26, despite persistent core inflation. The MPC noted that the inflation outlook remains broadly stable, supported by relatively benign global commodity prices and anchored expectations. The committee highlighted that economic activity is gaining momentum, with large-scale manufacturing posting stronger-than-expected growth in the first quarter of FY26. However, it cautioned that a challenging global environment, particularly for exports, could weigh on the macroeconomic outlook. Key developments since the last meeting include a rise in the unemployment rate, continued growth in the State Bank’s foreign exchange reserves, now above $15.8 billion following a $1.2 billion IMF disbursement, and improved consumer confidence. Fiscal balances recorded surpluses in the first quarter, aided by a sizable profit transfer from the central bank. The MPC assessed that the real policy rate remains sufficiently positive to stabilize inflation within the target range and support sustainable growth. The committee reiterated the need for coordinated monetary and fiscal policies, as well as structural reforms, to place the economy on a higher growth trajectory. On the real sector, the MPC reported robust momentum across key industries, with large-scale manufacturing growing 4.1% year-on-year in Q1-FY26. Positive trends in automobile, fertilizer, and cement sales, as well as machinery imports, signal a favorable outlook for industrial activity. Wheat production is also expected to surpass targets, further supporting the services sector. Real GDP growth for FY26 is projected to remain in the upper half of the 3.25-4.25% range. The current account deficit stood at $0.7 billion during July-October FY26, in line with expectations. While imports grew with economic activity, exports came under pressure due to a sharp decline in food exports, particularly rice. The central bank’s reserves have surpassed the December 2025 target, and are projected to reach $17.8 billion by June 2026, assuming planned official inflows materialize. On the fiscal front, both overall and primary balances posted surpluses in Q1-FY26, though Federal Board of Revenue (FBR) collections slowed, necessitating a significant acceleration to meet annual targets. Interest payments are expected to remain below budgeted levels, potentially helping to contain the fiscal deficit. The MPC underscored the importance of broadening the tax base and privatizing loss-making state-owned enterprises to strengthen fiscal buffers. Broad money growth accelerated to 14.9% as of late November, driven by increased government borrowing. Private sector credit expanded, particularly in textiles, wholesale and retail, and chemicals, while consumer financing remained strong amid improved sentiment and stable macroeconomic conditions. Headline inflation remained within the target range over the past three months, with food, energy, and core inflation converging. The MPC expects inflation to temporarily rise above the target range toward the end of FY26 due to base effects, before returning to target in FY27. Risks remain from volatile global commodity prices, energy price adjustments, fiscal slippages, and uncertainty in food prices. The MPC concluded that the current policy stance is appropriate to maintain price stability and support economic growth, while emphasizing the need for continued reforms and prudent fiscal management.