The Monetary Policy Committee cut the policy rate by 50 basis points, effective December 16, 2025. The decision followed the Committee’s meeting held on December 15, 2025. The move reflects improving economic conditions while maintaining inflation control.
Inflation remained within the target range of 5 to 7 percent during July to November FY26. Although core inflation stayed relatively sticky, the overall outlook remained stable. Benign global commodity prices and anchored expectations supported this assessment.
The Committee stated that price stability remains intact. Therefore, available policy space was used to support sustainable economic growth.
Economic Momentum Continues to Strengthen
Economic activity continued to gain momentum across major sectors. High-frequency indicators showed broad-based improvement. Large-scale manufacturing posted stronger-than-expected growth during the first quarter of FY26.
However, the global environment remained challenging, especially for exports. Despite these risks, domestic demand and production trends stayed positive. As a result, the policy easing aimed to reinforce growth without undermining stability.
Key Developments Since Last Review
The Labor Force Survey 2024–25 showed a higher unemployment rate compared to 2020–21. Still, employment growth accelerated compared to the previous survey.
Meanwhile, foreign exchange reserves rose above $15.8 billion despite heavy debt repayments. This increase followed the receipt of $1.2 billion from the IMF after successful program reviews.
Consumer confidence improved, while business confidence remained positive but slightly moderated. Additionally, both overall and primary fiscal balances recorded surpluses in Q1 FY26, mainly due to SBP profit transfers.
Real Sector Outlook Remains Positive
Industrial activity remained strong during Q1 FY26. Large-scale manufacturing grew 4.1 percent year-on-year, with most sectors reporting higher output. Automobile, fertilizer, and cement sales also showed solid performance.
Imports of machinery and intermediate goods signaled continued industrial expansion. However, export-related challenges continued to pose risks.
In agriculture, wheat production prospects improved due to favorable acreage, input availability, and incentive schemes. These gains are expected to support services sector activity. Consequently, GDP growth for FY26 is projected in the upper half of the 3.25 to 4.25 percent range.
External Sector and Reserve Position
The current account recorded a $0.7 billion deficit during July to October FY26. Imports rose in line with economic activity, while remittances remained resilient. Exports declined mainly due to weaker food shipments, particularly rice.
Despite modest financial inflows, SBP reserves exceeded the December target of $15.5 billion. Continued foreign exchange purchases supported this increase. Looking ahead, export growth may face global headwinds, while lower oil prices could limit import growth.
Overall, the current account deficit is expected to remain between 0 and 1 percent of GDP in FY26. Foreign exchange reserves are projected to reach $17.8 billion by June 2026.
Fiscal Performance and Reform Focus
Fiscal balances posted surpluses during Q1 FY26, supported by lower expenditure ratios. However, tax revenue growth slowed to 10.2 percent year-on-year, increasing pressure on future collections.
Lower interest payments may help contain the fiscal deficit. Still, achieving the targeted primary surplus remains challenging. Therefore, structural reforms, tax base expansion, and SOE privatization remain critical.
Inflation Outlook and Risks
Headline inflation stayed within the target range over the past three months. Food, energy, and core inflation trends moved broadly as expected. Prudent policies helped stabilize prices despite supply-side pressures.
Inflation may rise above the target toward the end of FY26 due to base effects. However, it is expected to return to the target range in FY27. Key risks include global commodity volatility, energy price adjustments, fiscal slippages, and food price uncertainty.
