The Monetary Policy Committee of the State Bank of Pakistan on Monday reduced the policy rate by 50 basis points to 10.5%, defying widespread market expectations of a status quo.
In a statement, the central bank said the revised policy rate will take effect from December 16, 2025.
Market participants had largely anticipated no change in the policy stance. Arif Habib Limited had expected the SBP to hold rates, citing fading base effects that had kept headline inflation low, a slight widening of the current account deficit, and the early stage of domestic economic recovery.
Most analysts surveyed expected the SBP to delay the start of an easing cycle until the closing months of FY26, ending in June 2026, with some extending expectations into fiscal year 2027.
The Monetary Policy Statement
The decision comes as a surprise to many but the Monetary Policy Statement indulges into great detail answering the questions. The unprecedented decision by the MPC, according to the policy statement, rests on three concurrent conditions.
Firstly, the MPC argues that the inflation averaged within the 5–7% target band during Jul–Nov FY26, giving the MPC confidence that disinflation has been achieved in headline terms. Importantly, this is not a one-month outcome but a multi-month trend.
Secondly, the MPC explicitly cites benign global commodity prices and anchored inflation expectations as stabilising forces. This means that the SBP expects the inflation to remain in check despite any short term price shocks that might happen, which lowers the risk of a rate cut feeding directly into second-round inflation effects, a fear that the market initially had, on the side of caution.
And thirdly, even after the cut, the MPC judges the real policy rate to remain adequately positive, signalling that monetary policy is still restrictive enough to control inflation even at 10.5%. While the SBP acknowledges a sticky core inflation, it maintains that it is not yet strong enough to dominate the broader inflation outlook.
Meanwhile , the MPC’s growth assessment is notably stronger than in previous meetings. It notices that the Large Scale Manufacturing (LSM) grew 4.1% y/y in Q1-FY26, exceeding expectations, along with a broad-based sectoral recovery, supported by automobile, fertilizer, and cement sales.
This suggests investment and production are responding to earlier monetary easing, creating justification to avoid choking momentum. Simultaneously, wheat acreage, input availability, and incentive schemes point toward production exceeding targets, lowering food inflation risks and supporting rural incomes.
The MPC explicitly links strong commodity-producing sectors to services sector expansion, reinforcing the growth narrative.
As a result, FY26 GDP growth is now expected in the upper half of the 3.25–4.25% range, implying confidence closer to ~4%.
It is important to note that Pakistan’s external position is stable but not comfortable, shaping the MPC’s cautious tone. With the current account deficit at $0.7bn (Jul–Oct FY26), within expectations. Resilient remittances and the stable FX reserves level, exceeding December target due to IMF inflows and SBP purchases, remain the only reason why the SBP is confident.
Meanwhile the statement also points towards the risk factors. It mentions the exports under pressure, especially food exports (rice), and an environment of uncertainty in the global trade and tariff dynamics, all while the net financial inflows remain tepid.
The MPC’s baseline remains intact: Current account deficit at 0–1% of GDP in FY26, with reserves projected to rise to $17.8bn by June 2026, assuming planned official inflows materialise. This explains why the cut is modest (50bps) rather than aggressive.
On the fiscal side the MPC points out that FBR revenue growth slowed to 10.2% y/y, far below what’s needed to hit annual targets, therefore achieving the targeted primary surplus remains challenging. Heavy reliance on one-off SBP profits is not sustainable, and broadening the tax base, and privatising loss-making SOEs is the long-term way to go.
This is a clear signal from the MPC that monetary easing cannot substitute for fiscal reform.
The MPC is explicit about forward risks. It states that the inflation may rise above target near end-FY26 due to a low base effects, energy price adjustments, fiscal slippages, price uncertainty for wheat and perishable foods and global commodity volatility.
Crucially, inflation is expected to return to target in FY27, reinforcing the view that current risks are temporary, not structural.
The 50bps cut is a data-driven recalibration reflecting confidence in inflation control, cautious optimism on growth, and an attempt to support recovery without undermining macro stability.
Market’s Reaction:
Market participants said the decision ran counter to prevailing expectations, as most analysts had anticipated the central bank would maintain the status quo.
“This came as a surprise in our view, as the majority of participants were expecting rates to remain unchanged,” Topline Securities said in a note.
Arif Habib Limited (AHL) had also expected no change in the policy rate, arguing that a cautious stance was warranted as the base effect that had been suppressing headline inflation begins to fade. It added that the slight widening of the current account deficit and the still-early stage of domestic economic recovery supported a prudent, wait-and-see approach.
Earlier this month, a Reuters poll echoed this view, with all 12 analysts surveyed expecting no change in the policy rate. Most respondents believed the State Bank would delay any easing until the latter part of FY26, with some pushing the first cut into FY27.
