The State Bank of Pakistan is widely expected to reduce its policy rate at the upcoming Monetary Policy Committee meeting scheduled for January 26, 2026, as easing inflation, improving external stability and declining bond yields strengthen the case for further monetary easing. Market participants and brokerage houses see growing room for the central bank to support economic activity after a prolonged period of tight monetary conditions.
Arif Habib Limited said on Friday that it expects the SBP to deliver a 75 basis point cut in the upcoming MPC meeting, which would potentially bring the policy rate down to 9.75% and mark a return to single-digit interest rates after several years. According to the brokerage, such a move would signal a clear shift in the monetary stance as macroeconomic indicators increasingly support an easing cycle.
In explaining its outlook, AHL noted that inflation has cooled significantly over recent months, providing the central bank with much-needed space to reduce borrowing costs. The brokerage highlighted that the broader macroeconomic environment has become more supportive, with the currency remaining broadly stable, the current account position manageable and international commodity prices, particularly oil, showing a downward trend. It also pointed to signs of a pickup in domestic demand and industrial growth, factors that could benefit from lower interest rates.
AHL said that taken together, these developments allow the SBP to implement a rate cut without risking macroeconomic instability. It added that a 75 basis point reduction is well aligned with current economic realities, as inflation dynamics are favourable, growth requires nurturing, fiscal pressures call for some relief and external sector stability remains intact.
At the same time, the brokerage suggested that there may be even greater room for easing if conditions continue to improve. While stopping short of forecasting a larger move, AHL observed that if confidence remains strong and key indicators continue to cooperate, the space for a bolder step, such as a 100 basis point cut, quietly exists beneath the prevailing consensus.
The expectations come after the SBP surprised markets last month by cutting the policy rate by 50 basis points to 10.5%, ending a period of relative policy caution. That decision took the cumulative reduction in interest rates since the peak of 22% to 1,150 basis points, underscoring a gradual but steady shift toward monetary easing.
Topline Securities, another leading brokerage house, has also projected a rate cut at the January MPC meeting. Citing the results of its recent survey, the firm said that 80% of participants expect some form of rate reduction. Among those anticipating a cut, 56.4% expect a 50 basis point move, 15.4% foresee a deeper 100 basis point cut, 5% expect a 25 basis point reduction and 3% anticipate a 75 basis point cut.
According to Topline Securities, the change in market perception has been driven by lower-than-expected inflation readings over the past two months, stronger-than-anticipated remittance inflows supporting the external account, and a largely stable exchange rate between the Pakistani rupee and the US dollar. These factors have helped ease concerns around balance of payments pressures and currency volatility, which previously constrained the central bank’s policy choices.
Despite acknowledging the case for easing, Topline Securities said it expects the SBP to opt for a more measured approach, forecasting a 50 basis point cut that would bring the policy rate down to 10.0%. The brokerage noted that real interest rates, based on average inflation for FY26, are currently around 350 basis points, which is significantly higher than the historical average of around 200 basis points.
In its view, the central bank is likely to maintain above-average real interest rates even as it cuts nominal rates, in order to ensure sustainable economic growth and guard against a resurgence of inflationary pressures. This approach would allow the SBP to balance growth support with price stability, particularly in an environment where global uncertainties and domestic structural challenges persist.
As the January 26 MPC meeting approaches, investors and businesses are closely watching the SBP’s next move for signals on the pace and depth of the easing cycle. While expectations differ on the size of the cut, there is broad consensus that the direction of policy is now firmly tilted toward easing, reflecting improved macroeconomic conditions and a growing emphasis on supporting economic recovery.
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