The State Bank of Pakistan (SBP) surprised financial markets on Monday by reducing its policy rate by 50 basis points to 10.5%, a move that went against near-unanimous expectations of a status quo. The decision, announced by the Monetary Policy Committee (MPC), will take effect from December 16, 2025, and marks an early recalibration of monetary policy at a time when analysts believed the central bank would remain cautious.
Ahead of the announcement, market participants had largely priced in no change. Brokerage houses, including Arif Habib Limited, had pointed to fading base effects that were keeping headline inflation artificially low, a slight widening in the current account deficit, and the fragile stage of domestic economic recovery as reasons for the SBP to pause. A Reuters poll conducted earlier in the month showed all 12 analysts surveyed expected the central bank to hold rates steady, with most projecting the start of easing only toward the end of FY26 or even into FY27.
However, the MPC’s Monetary Policy Statement laid out a detailed rationale for the unexpected cut, anchoring the decision on three parallel developments. First, the committee highlighted that headline inflation averaged within the 5–7% target range during July to November of FY26. This was not viewed as a one-off outcome but rather as a sustained, multi-month trend, giving policymakers confidence that disinflation has been achieved in headline terms.
Second, the MPC pointed to benign global commodity prices and well-anchored inflation expectations. According to the central bank, these factors are expected to act as stabilisers, reducing the risk that a rate cut could translate into second-round inflationary pressures. This directly addressed one of the market’s key concerns, namely that premature easing could reignite price instability.
Third, the MPC assessed that even after the 50bps reduction, the real policy rate remains adequately positive. This signals that monetary conditions are still restrictive enough to manage inflation risks, despite acknowledging that core inflation remains sticky. The committee maintained that core pressures are not yet strong enough to dominate the broader inflation outlook.
Beyond inflation, the MPC’s assessment of economic growth was notably more optimistic than in previous meetings. Large Scale Manufacturing recorded a 4.1% year-on-year increase in the first quarter of FY26, surpassing expectations and reflecting a broad-based recovery. Key sectors such as automobiles, fertilisers, and cement showed strong momentum, indicating that earlier monetary easing has begun to support investment and production activity.
Agricultural indicators also strengthened the growth narrative. Wheat acreage, improved input availability, and incentive schemes suggest production may exceed targets, which could help contain food inflation while supporting rural incomes. The MPC also drew a direct link between stronger commodity-producing sectors and expansion in the services sector, reinforcing confidence in the recovery. As a result, FY26 GDP growth is now projected to land in the upper half of the 3.25–4.25% range, implying growth closer to 4%.
Despite these positives, the external sector remains a key constraint shaping the MPC’s cautious tone. The current account deficit stood at $0.7 billion during July to October FY26, broadly in line with expectations. Stable foreign exchange reserves, supported by IMF inflows and SBP purchases, and resilient remittances have provided comfort, but vulnerabilities persist. Exports, particularly rice, remain under pressure, while global trade and tariff uncertainties and weak financial inflows pose ongoing risks.
On the fiscal front, the MPC flagged slowing FBR revenue growth, which rose only 10.2% year-on-year, far below what is required to meet annual targets. The statement warned that reliance on one-off SBP profits is unsustainable and underscored the need for structural reforms, including tax base broadening and privatisation of loss-making state-owned enterprises. The message was clear that monetary easing cannot compensate for delayed fiscal reform.
Market reaction reflected the surprise. Topline Securities described the move as contrary to prevailing expectations, echoing sentiments across the financial community. While the 50bps cut signals growing confidence in inflation control and economic recovery, the SBP has made it clear that risks remain and that future decisions will stay tightly linked to incoming data and macroeconomic stability.
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