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%.

Analysts had largely expected the central bank to stay on hold. Headline inflation has been gradually increasing, rising from 4.1% in July to 6.1% in November, largely due to disruptions in the food supply caused by floods.

An analyst at Arif Habib Limited (AHL) said in a recent note that the central bank was likely to keep rates steady at the December meeting to maintain stability while adopting a cautious stance, as the base effect that had kept headline inflation low is now fading.

“The slight widening of the current account deficit and the early stage of domestic economic recovery further support a prudent, wait-and-see approach from the central bank,” it added.

According to the AHL report, inflationary pressures may increase in the near term, with seasonal factors such as Ramazan and Eid in the second half of FY26 potentially pushing monthly inflation higher. “There remains a possibility that inflation temporarily tests double-digit levels if monthly momentum picks up; however, the full-year FY26 average is still likely to remain within the SBP’s medium-term target range of 5-7%,” it said.

On the external front, conditions are generally stable but require careful monitoring, the report noted, warning that rising import demand and changing trade dynamics could create additional pressure ahead. Some analysts now believe the SBP may not resume easing until the next fiscal year, beginning in July 2026.

“Our base case assumes a reduction of 100 bps [basis points] in interest rates during FY27, while remaining unchanged for the remainder of FY26,” said Mustafa Mustansir, head of research at Taurus Securities Limited.

Analysts also pointed to the SBP’s preference for maintaining positive real interest rates. “An unchanged rate also helps preserve positive real interest rates and aligns with IMF-backed policy discipline, especially amid still-fragile external buffers,” said Saad Hanif, head of research at Ismail Iqbal

Securities. “With the bulk of easing already delivered earlier, the MPC [Monetary Policy Committee] is likely to wait for clearer, sustained disinflation before considering further cuts,” Hanif added.

The International Monetary Fund, in a staff report released on Thursday, said monetary policy needs to remain sufficiently tight and data-driven to keep inflation within the SBP’s target range, adding that the SBP’s cautious approach has helped manage inflation risks despite volatile conditions and temporary declines in headline inflation.

“Going forward, the SBP should continue to carefully monitor the recent floods’ impact on inflation and the external position and stand ready to act decisively to maintain well-anchored expectations,” it said.