Pakistan Central Bank Surprises with 50bps Rate Cut

The State Bank of Pakistan kept its benchmark policy rate at 10.5% in January, surprising markets that had expected a cut to 10% following two reductions last year. Headline inflation eased to a three-month low of 5.6% in December, remaining within the 5–7% target range, with the central bank projecting inflation to stay within this range through FY26 and FY27. Economic activity remained robust, with Q1-FY26 GDP rising 3.7% year-on-year, up from 1.6% in the same period last year, driven primarily by industrial and agricultural sectors. GDP growth for FY26 is projected at 3.75–4.75%. On the external front, the current account deficit widened, but steady workers’ remittances and resilient ICT exports helped contain pressures. FX reserves have been building and are expected to exceed $18 billion by FY26-end. The MPC noted the current rate supports price stability and growth, highlighting coordination with fiscal policy and structural reforms.

The State Bank of Pakistan cut its benchmark policy rate by 50 basis points to 10.5% in December, marking the second rate cut this year and surprising market expectations, which had forecast no change. The move followed the IMF’s approval of a $1.2 billion disbursement, which bolstered foreign exchange reserves to over $15.8 billion and enabled the government to service its debt. Inflation remained within the 5–7% target range between July and November FY26, supported by moderate global commodity prices and anchored expectations, though core inflation remains sticky. High-frequency indicators point to continued momentum in industry and agriculture, with large-scale manufacturing up 4.1% YoY in Q1-FY26 and wheat production expected to exceed targets. While exports face pressure amid global headwinds, robust FX reserves and improving fiscal balances provide room for policy support.

The State Bank of Pakistan kept its benchmark policy rate unchanged at 11% in October, marking a fourth consecutive hold, citing a stronger macroeconomic outlook and a milder-than-expected impact from recent floods. Real GDP for 2026 has been revised upward to the upper half of the previously projected 3.25–4.25% range, underpinned by robust performance in agriculture and industry, rising domestic demand, and continued private-sector investment. Headline inflation rose to 5.6% in September, driven by flood-related crop losses and energy price pressures, but remains within the central bank’s 5–7% target range. Inflation is expected to temporarily breach the upper bound in the second half of FY26 before returning to target in FY27. Post-flood rehabilitation expenditures are likely to be financed through budgeted fiscal resources. The current account deficit is projected to stay within 0–1% of GDP, while foreign exchange reserves are expected to reach $15.5 billion by December 2025.