Pakistan Central Bank Surprises with 50bps Rate Cut

The State Bank of Pakistan kept its benchmark policy rate unchanged at 10.5% in March, as expected, extending the pause in its easing cycle. Policymakers cited heightened economic uncertainty as oil prices surged amid escalating tensions in the Middle East. Pakistan remains particularly vulnerable to rising energy costs due to its heavy reliance on imported fuel. A prolonged energy shock could also pressure the rupee and complicate the country’s commitments under its IMF stabilization program. Analysts warn the recent fuel price increase could push inflation to around 9.25% in the second quarter, with headline inflation having risen to 7% in February, the highest since October 2024. Meanwhile, the government’s 4.2% GDP growth target for the fiscal year ending July is becoming increasingly challenging amid the Middle East crisis, severe monsoon floods that displaced roughly three million people, and supply-chain disruptions linked to clashes with Afghanistan.

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.