The State Bank of Pakistan has kept the policy interest rate unchanged at 10.5 percent. This decision marks the central bank’s first monetary policy announcement of 2026.
The policy rate will remain unchanged for the next two months. The central bank stated that the move aims to preserve price stability while supporting sustainable economic growth.
The decision surprised many market participants. A rate cut had been widely anticipated ahead of the announcement.
According to the Monetary Policy Committee, headline inflation stood at 5.6 percent year-on-year in December 2025. This figure aligned with the central bank’s earlier projections.
However, core inflation has remained elevated. It hovered around 7.4 percent in recent months, reflecting persistent underlying price pressures.
Meanwhile, economic activity has strengthened faster than expected. High-frequency indicators showed improving momentum, particularly in domestic-oriented sectors.
The committee noted a widening trade deficit. Imports rose sharply, while exports declined during the period.
Despite this trend, the current account deficit remained relatively contained. Strong workers’ remittances and stable global commodity prices provided support.
Based on these factors, the committee assessed that inflation and external account outlooks remain broadly unchanged. In contrast, the economic growth outlook has improved significantly.
Economic Growth and Sectoral Performance
Real GDP expanded by 3.7 percent year-on-year in the first quarter of FY26. This marked a notable improvement compared to the same period last year.
Economic momentum continued into the second quarter. Indicators such as auto sales, cement dispatches, and petroleum consumption recorded solid growth.
Large-scale manufacturing also showed strong performance. It posted year-on-year growth of 8 percent in October and 10.4 percent in November 2025.
As a result, cumulative manufacturing growth reached 6 percent during July to November FY26.
Agriculture indicators also appeared encouraging. Wheat sowing data and satellite imagery pointed to positive crop prospects.
The central bank now projects real GDP growth between 3.75 and 4.75 percent for FY26. Growth momentum is expected to strengthen further in FY27.
Inflation Outlook and Monetary Measures
Headline inflation eased due to softer food prices. However, energy inflation increased following the fading of favorable base effects.
Core inflation remained sticky during the first half of FY26. This trend influenced the committee’s cautious stance.
The central bank expects inflation to stabilize within the 5 to 7 percent target range. Temporary breaches may occur for a few months in 2026.
In addition, the central bank reduced the average Cash Reserve Requirement from 6 percent to 5 percent. This step aims to support private sector credit growth.
Overall, the policy decision reflects a balanced approach. The central bank seeks to anchor inflation expectations while sustaining economic recovery.
