Contrary to market expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) reduced the policy rate by 50 basis points to 10.5% on Monday, effective December 16, 2025. Analysts and market participants had widely anticipated that the central bank would maintain the status quo, making the decision a surprise.
This latest cut brings cumulative easing since the policy rate peaked at 22% to 1,150 basis points. The rate had remained unchanged for four consecutive MPC meetings prior to Monday’s decision, with the last reduction of 100 basis points occurring in the May 5, 2025 meeting. At its previous meeting on October 27, 2025, the MPC had kept rates steady at 11%, noting that the impact of recent floods on the broader economy was lower than anticipated.
Market experts expressed surprise at the decision. Topline Securities noted that the majority of participants had expected the rates to remain unchanged. Arif Habib Limited (AHL) had forecasted no change, highlighting that while headline inflation pressures were emerging, a cautious stance was warranted. According to AHL, the slight widening of the current account deficit and the early stage of domestic economic recovery further justified a wait-and-see approach. Similarly, a Reuters poll of 12 analysts had also expected no cut, with most projecting that easing would begin only toward the end of FY26 or even in FY27, following IMF guidance on inflation risks.
Economic indicators since the last MPC meeting have shown mixed trends. Pakistan’s headline inflation rose to 6.1% YoY in November 2025, while core inflation remained steady at 7.3% in September. The rupee appreciated marginally by 0.2%, and international oil prices dropped over 6% to around $57 per barrel. The country posted a current account deficit of $112 million in October 2025. Meanwhile, SBP-held foreign exchange reserves rose to $14.58 billion as of December 5, 2025, and net foreign reserves held by commercial banks stood at $5.03 billion, bringing total liquid foreign reserves to $19.61 billion.
The MPC’s unexpected rate cut reflects a strategic shift aimed at supporting the domestic economic recovery while balancing inflationary pressures. Industrialists and businesses had lobbied for a reduction ahead of the final MPC meeting of 2025, highlighting the need for policy accommodation to sustain growth momentum.
By reducing the policy rate, the SBP aims to encourage credit expansion and investment, potentially stimulating economic activity during the early stages of recovery, even as inflation and external sector vulnerabilities remain under close monitoring.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.