SBP defies market expectations with 50bps rate cut

• Rate cut despite inflation pressures, external considerations.
• Market experts had expected central bank to hold policy rate.
• This is the first interest rate cut since May 5, 2025.

The State Bank of Pakistan (SBP) on Monday slashed the key policy rate by 50 basis points to 10.5% in a surprise move despite food-led inflation pressures and external considerations.

In the last four monetary policy meetings, the central bank had observed the status quo. The last cut of 100 bps was announced after the May 5 meeting, reducing the policy rate to 11%.

In its statement, the central bank said that its Monetary Policy Committee (MPC) decided to slash the policy rate amid improving macroeconomic indicators.

The committee noted that inflation on average remained within the target range of 5% to 7% during July-November of the fiscal year 2026.

However, it noted that core inflation in the country was proving to be "relatively sticky".

The MPC also assessed that economic activity continued to gain traction, on the back of improvement in macroeconomic indicators, including a "higher than anticipated increase in large-scale manufacturing in Q1-FY26".

It noted that the global environment remained challenging, particularly for exports, which may have some implications for the macroeconomic outlook.

"In this backdrop, while ensuring the ongoing price stability, the MPC noted the available space to reduce the policy rate to support sustainable economic growth," the statement read.

During the meeting, the committee also noted the increase in the unemployment rate in the Labour Force Survey 2024-25 and an increase in the central bank’s foreign exchange reserves "despite sizable ongoing debt repayments".

The MPC stated that the foreign reserves reached $15.8 billion after the SBP received $1.2 billion from the International Monetary Fund (IMF).

Additionally, the meeting took note of the improving consumer confidence, saying that surveys showed business confidence, though remaining positive, moderated slightly.

"Led by sizable SBP profit transfer, the overall and primary fiscal balances recorded surpluses during Q1-FY26. Lastly, the global environment remains fluid, characterised by generally supportive commodity prices, but also evolving tariff-related dynamics and challenging financial conditions," it added.

The committee attributed the developments to its decision to ensure policy rate remained "adequately positive to stabilise inflation within the target range of 5–7% over the medium term and contribute towards sustainable economic growth".

However, the MPC emphasised the need for continuing the coordinated and prudent monetary and fiscal policies, and undertaking structural reforms, to put the economy on a durable and higher growth trajectory.