The State Bank of Pakistan has decided to keep its benchmark policy rate unchanged at 10.5 percent following the Monetary Policy Committee meeting held on January 26, 2026, citing an improved economic growth outlook alongside persistent inflationary risks and external sector pressures. The decision marks the central bank’s first MPC meeting of the year and comes amid growing market expectations of a rate cut following easing headline inflation and improving foreign exchange indicators.
In its Monetary Policy Statement, the MPC noted that headline inflation stood at 5.6 percent year-on-year in December 2025, broadly in line with earlier projections. However, the committee highlighted that core inflation has remained elevated at around 7.4 percent in recent months, signaling underlying price pressures despite moderation in food inflation. The MPC also observed that economic activity is gaining momentum faster than previously anticipated, driven largely by domestic-oriented sectors, as reflected in recent high-frequency indicators including large-scale manufacturing.
The committee acknowledged a widening trade deficit resulting from a sharp rise in import volumes and a decline in exports. Despite this, resilient workers’ remittances and relatively benign global commodity prices helped contain the current account deficit. On balance, the MPC concluded that while the inflation and external account outlooks remain broadly unchanged, the economic growth outlook has improved significantly, warranting a pause in the easing cycle to safeguard price stability and support sustainable growth.
Since the previous MPC meeting, several key developments have shaped the policy environment. Provisional data showed real GDP growth of 3.7 percent year-on-year in the first quarter of FY26, led primarily by the industry and agriculture sectors. Both consumer and business confidence improved during this period, while inflation expectations eased. Meanwhile, SBP’s foreign exchange reserves exceeded the end-December target, reaching $16.1 billion by January 16, supported mainly by interbank FX purchases. On the fiscal side, Federal Board of Revenue revenue growth slowed to 7.3 percent in December, falling short of targets, while the IMF marginally upgraded its global growth outlook for 2026 but warned of risks from tariff uncertainty and volatile commodity prices.
Reflecting these trends, the MPC assessed the real policy rate to be sufficiently positive to anchor inflation within the medium-term target range of 5 to 7 percent. The committee reiterated the importance of a coordinated monetary and fiscal policy mix, along with productivity-enhancing structural reforms, to boost exports and achieve sustainable long-term growth.
On the real sector, economic momentum strengthened notably in the first quarter of FY26 compared to the same period last year. High-frequency indicators such as auto sales, cement dispatches, fertilizer off-take, petroleum product sales excluding furnace oil, and imports of machinery and intermediate goods pointed to sustained domestic demand. Large-scale manufacturing grew by 8.0 percent in October and 10.4 percent in November 2025, lifting cumulative LSM growth to 6.0 percent during July–November FY26. In agriculture, early indicators including satellite imagery suggest favorable prospects for the wheat crop, which could further support services sector growth. Based on these developments, the SBP now projects GDP growth in the range of 3.75 to 4.75 percent for FY26, with momentum expected to carry into FY27.
In the external sector, the current account posted a deficit of $244 million in December, taking the cumulative deficit for the first half of FY26 to $1.2 billion. The deterioration was driven mainly by weaker food exports, particularly rice, though higher-value textile exports remained resilient. Strong remittance inflows and growth in ICT services exports helped offset some of the pressure. The SBP expects the current account deficit to remain contained between zero and one percent of GDP in FY26, with FX reserves projected to exceed $18 billion by June, subject to risks from global trade fragmentation and geopolitical uncertainty.
On inflation, the central bank projects headline inflation to stabilize within the 5 to 7 percent target range over FY26 and FY27, after temporarily exceeding the upper bound during parts of the current year. However, risks remain from commodity price volatility, administrative energy price adjustments and a stronger-than-expected pickup in domestic demand. The MPC’s decision signals a cautious approach as Pakistan navigates improving growth conditions alongside lingering inflation and fiscal challenges.
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