Monetary Policy Committee of SBP Keeps Policy Rate Unchanged at 10.5%

The Monetary Policy Committee (MPC) of the State Bank of Pakistan on Monday decided to keep the policy rate unchanged at 10.5%, citing stable inflation trends and an improved outlook for economic growth.

In its statement, the Committee said headline inflation stood at 5.6% year-on-year in December 2025, in line with expectations. However, core inflation remained relatively elevated at around 7.4%. The MPC noted that economic activity has accelerated faster than anticipated, supported mainly by domestic-oriented sectors, as reflected in recent high-frequency indicators and strong large-scale manufacturing performance.

The Committee observed that the trade deficit widened due to a significant increase in imports and a decline in exports. Despite this, the current account deficit remained contained, supported by steady workers’ remittances and favorable global commodity prices. Based on these trends, the MPC said the outlook for inflation and the external account remained broadly unchanged, while the growth outlook had improved considerably.

Provisional data showed real GDP growth of 3.7% year-on-year in the first quarter of FY26, compared to 1.6% in the same period last year, driven mainly by the industrial and agriculture sectors. Consumer and business confidence improved during the period, while inflation expectations eased.

The Committee also noted that the State Bank’s foreign exchange reserves reached $16.1 billion as of January 16, exceeding the end-December target, largely due to interbank foreign exchange purchases. Meanwhile, FBR tax revenue growth slowed to 7.3% in December, falling below the target, though lower interest payments helped contain overall fiscal pressures.

On the real sector front, indicators such as auto sales, cement dispatches, POL sales, fertilizer off-take, and imports of machinery showed continued strength. Large-scale manufacturing grew by 8.0% in October and 10.4% in November, raising cumulative growth to 6.0% during July-November FY26. Early indicators also suggested encouraging prospects for the wheat crop.

The MPC revised its real GDP growth projection for FY26 to between 3.75 and 4.75%, with expectations of further improvement in FY27 amid macroeconomic stability.

The Committee assessed that the real policy rate remains adequately positive to keep inflation within the target range of 5 to 7% over the medium term. It emphasized the need for prudent coordination between monetary and fiscal policies, along with structural reforms, to support sustainable economic growth.

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