The SBP holds policy rate at 10.5% but loosens liquidity through CRR

Pakistan’s Monetary Policy Committee (MPC) on Monday kept the policy rate unchanged at 10.5%, defying market expectations that a further cut would take borrowing costs closer to single digits. 

The decision lands in an economy that looks calmer and firmer compared to the previous quarters. Moreover, the external account has seen more diversification in the last 2 months. 

Headline inflation has eased to 5.6% year-on-year in December 2025, inside SBP’s medium-term target band of 5–7%, but core inflation has steadied around a higher 7.4% in recent months. At the same time, SBP says domestic-oriented sectors are driving a faster-than-expected pickup in momentum, even as import volumes rise and exports weaken, widening the trade deficit. 

For markets, the surprise is not that SBP sees risks; it is that the central bank has chosen to pause just one month after a surprise 50 basis-point cut in December, at a time when many participants were leaning toward continued easing. 

Earlier, reuters reported a poll expectation of a 50 basis-point cut ahead of the meeting, and noted cumulative easing of 1,150 basis points since mid-2024, making Monday’s hold a clear signal that the MPC wants more evidence before it risks reigniting inflation expectations. 

Why hold when headline inflation is back in range?

SBP’s core argument is that the inflation and external outlooks are broadly unchanged from the last assessment, but the growth outlook has improved enough to justify caution. 

In its statement, the MPC frames the real policy rate as “adequately positive” for stabilising inflation within the 5–7% band over the medium term, and explicitly points to the need for a coordinated monetary-fiscal mix and productivity-enhancing reforms to lift exports and sustain growth. 

This means that the MPC wants to make sure that the current bout of reduced inflation is here to stay and is hopeful that any government expenditures or policies, that can directly impact the inflation levels, is made while keeping that in mind.

This combination matters because a positive real rate gives the MPC room to avoid chasing short-term moves in headline CPI, particularly when it expects near-term volatility. The SBP projects inflation to stabilise within target in FY26 and FY27.

An important thing that the SBP notes is that inflation may temporarily exceed the upper bound for a few months during the current calendar year, with risks tied to global commodity prices, domestic wheat prices, administrative energy adjustments, and stronger-than-assumed demand. 

SBP is not just looking at the “headline” number. It is watching core inflation, and because that remains stuck around 7%, it is holding back from cutting rates.

Growth is accelerating faster than SBP expected; Is that good?

The statement’s real-sector section is a more detailed justification for the patience. As previously reported, provisional real GDP growth is reported at 3.7% year-on-year in Q1-FY26, up from 1.6% in the same period last year, led mainly by industry and agriculture. 

SBP argues that the momentum continues into Q2 on the basis of multiple high-frequency indicators, including auto sales, cement dispatches, POL sales excluding furnace oil, fertiliser offtake, and machinery and intermediate goods imports. This does not necessarily indicate improvement but rather a momentary spike due to various factors like calendar year end or production cycles.

Large-scale manufacturing is the centrepiece, and the SBP cites LSM growth of 8.0% in October and 10.4% in November, lifting cumulative LSM growth to 6.0% during July–November FY26. 

On that basis, the central bank upgrades FY26 growth projections to a 3.75–4.75% range, and signals that momentum may strengthen further in FY27 as earlier rate cuts continue to transmit through the economy. 

In practice, that upgrade is more complicated, when looked at with the pretext of near-term easing. A central bank cutting into an accelerating cycle takes on the burden of proving that demand expansion will not translate into renewed inflation, particularly when imports are already rising. This brings us to the external account position of Pakistan.

External account; widening trade gap and contained deficits

SBP’s external-sector narrative is also a balancing act. The current account posted a $244 million deficit in December 2025, taking the H1-FY26 cumulative deficit to $1.2 billion. The driver is the trade account.

SBP attributes the widening trade deficit to substantial import growth and export decline, with weakness concentrated in food exports, particularly rice, while high value-added textile exports remain resilient. 

Containment comes from remittances and services. SBP points to sustained workers’ remittances and ICT services exports as offsets that have helped keep the current account deficit contained and allowed SBP to build reserves through interbank market purchases. SBP’s FX reserves reached $16.1 billion as of January 16, and the bank expects reserves to surpass $18.0 billion by June 2026, conditional on planned official inflows. 

The vulnerability is that this is not an export-led external improvement. It is a stability story that depends on remittances staying strong, commodity prices remaining supportive, and planned inflows materialising on time, while import demand expands with domestic activity. SBP itself flags major risks from global trade fragmentation and geopolitical uncertainty. 

Fiscal constraints: revenue shortfall, consolidation pressures

A key reason the SBP is reluctant to move too quickly is that macro stability is not just a monetary story. In its fiscal-sector section, SBP reports that FBR tax revenues grew 9.5% in H1-FY26 versus 26% in the same period last year, undershooting targets by Rs329 billion. 

While estimates from the financing side suggest improvement in the fiscal balance, SBP highlights that achieving the annual primary surplus target appears challenging, and it again emphasises structural reforms: broadening the tax base and privatising loss-making SOEs. 

For the MPC, that translates into a practical constraint: if fiscal consolidation weakens, monetary easing becomes harder to sustain without pressuring the exchange rate and inflation expectations. The statement’s insistence on policy coordination is not rhetorical; it is a prerequisite for any durable easing cycle.

The liquidity offset: CRR cut without a policy-rate cut

The most market-relevant twist in the announcement is that SBP paired the rate hold with an easing of liquidity constraints. It has reduced the average Cash Reserve Requirement (CRR) for banks from 6.0% to 5.0%, a move SBP says is expected to increase private sector credit. 

The cash reserve requirement (CRR) is the minimum share of a bank’s customer deposits that it must keep parked as cash balances with the State Bank of Pakistan, rather than lending out or investing. 

Because these reserves are typically not available for earning returns, CRR directly affects how much liquidity banks have for credit growth and how costly it is for them to intermediate deposits into loans. When SBP lowers the CRR, it releases part of those locked-up funds back into the system, giving banks more room to expand lending and, in some cases, marginally improve profitability because a smaller portion of deposits sits idle.

Various equity research houses have focused on what this means for banks and credit transmission. Topline Pakistan highlighted that CRR balances are not remunerated and estimated the CRR reduction could release roughly Rs300 billion in additional lendable funds, with a potential uplift to banking sector profitability of under 2%, while also supporting economic activity through incremental credit. Reuters also framed the CRR move as a step to encourage private sector credit, even as the MPC keeps the headline rate unchanged. 

SBP’s own money-and-credit data suggests this transmission channel is already reopening. Broad money (M2) growth accelerated to 16.3% by January 9, driven by higher private sector credit and government borrowing, with private sector credit expanding by Rs578 billion during FY26 (to January 9). SBP lists textiles, wholesale and retail trade, and chemicals among the major borrowers, and notes that consumer financing continues to rise. 

This combination is deliberate: keep the policy signal restrictive enough to anchor expectations, but loosen a specific operational constraint that can amplify credit growth, particularly in the banking sector. It is, in effect, a targeted liquidity easing in place of a headline rate cut.

What analysts say SBP is really doing

IMS Research described the decision as another surprise, pointing to sticky core inflation above 7%, elevated import prints and weak exports as factors behind the prudence, while acknowledging that high-frequency indicators show acceleration across several sectors and that SBP raised its FY26 growth range to 3.75–4.75%. 

IMS also flagged that inflation could move above 7% later in the third and fourth quarters due to base effects, and concluded that further rate cuts may be off the table for the remainder of FY26 as inflation risks rise beyond February 2026.

A similar read from AKD’s investment analysts, noted the view that SBP is likely to remain on pause to assess inflation trends, with an expectation that the policy rate could stay at 10.5% for the rest of the fiscal year. 

Taken together, the research view converges on a single idea: SBP is trying to avoid an easing cycle that outruns the disinflation process, especially when demand and imports are already rising and core inflation is not falling further.

SBP has given a clear framework for the next move, even without explicit forward guidance. If core inflation begins a sustained downshift, wheat prices stabilise, energy tariff adjustments do not surprise, and the external account remains contained as imports rise, the case for further easing could reopen. Conversely, if demand accelerates faster than SBP’s assumptions and translates into renewed price pressures, or if commodity prices and geopolitics push imported inflation higher, the MPC’s bar for cuts rises further.

For now, the message is that the easing cycle is no longer automatic. SBP is holding the headline rate, loosening liquidity through CRR, and placing the burden of “sustainable growth” on exports, fiscal execution, and structural reform delivery, not on faster monetary easing.