Islamabad: The State Bank of Pakistan (SBP) on Monday decided to maintain its key policy rate at 10.5 percent, surprising some market participants who had expected a rate cut. In its Monetary Policy Statement, the SBP noted that while headline inflation stood at 5.6% in December 2025, core inflation remained higher at 7.4%. The external current account posted a $244 million deficit in December, bringing the first-half FY2026 deficit to $1.2 billion, driven mainly by weaker food exports, particularly rice. High-value textile exports remained resilient, and continued growth in workers’ remittances and ICT services helped contain the deficit.
The SBP’s Monetary Policy Committee (MPC) said inflation and the current account were broadly stable, while the outlook for economic growth had improved. Real GDP growth for the first quarter of FY2026 was provisionally reported at 3.7% year-on-year, led by strong performance in the industry and agriculture sectors. Indicators such as auto sales, cement dispatches, petroleum products, fertiliser off-take, and machinery imports suggested sustained domestic demand. Large-scale manufacturing grew 8% in October and 10.4% in November, bringing overall growth to 6% during July–November FY2026. Agriculture prospects, particularly for wheat, were also encouraging.
The MPC revised GDP growth projections for FY2026 to 3.75–4.75%, expecting momentum to continue into FY2027. Consumer and business confidence had improved, and inflation expectations had eased. The SBP’s forex reserves reached $16.1 billion as of January 16 and are expected to surpass $18 billion by June 2026, approaching the three-month import cover benchmark.
However, the MPC highlighted risks, including global trade fragmentation and geopolitical uncertainty. Federal tax revenues grew only 9.5%, well below last year’s pace, resulting in a Pkr 329 billion shortfall, emphasizing the need for fiscal discipline and consolidation to achieve sustainable growth. Broad money supply increased 16.3%, driven by private sector credit and government borrowing, with private credit expanding by Pkr 578 billion so far in FY2026.
The MPC also noted that the IMF slightly upgraded Pakistan’s global growth forecast, though risks remain due to volatile global commodity prices and tariffs. Against this backdrop, the committee decided to maintain the real policy rate to stabilize inflation within the 5–7% target range while stressing the importance of coordinated monetary and fiscal policies, structural reforms, and export growth. During the last meeting, the SBP had lowered the benchmark rate to 10.5%, noting that inflation remained largely within the target range, though core inflation remained sticky.
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