Against all expectations but better sense SBP maintains its policy rate at 10.5%. Lowered the average Cash Reserve Requirement for banks from 6% to 5%.

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SBP MPC Holds Policy Rate at 10.5% as Growth Momentum Strengthens

The State Bank of Pakistan’s Monetary Policy Committee (MPC) has decided to keep the policy rate unchanged at 10.5 percent, reflecting a growing confidence in macroeconomic stability while remaining mindful of lingering inflationary pressures.

Headline inflation eased to 5.6 percent year-on-year in December 2025, broadly in line with the MPC’s expectations. However, the Committee noted that core inflation has remained sticky, hovering around 7.4 percent in recent months. This persistence suggests that underlying price pressures have yet to fully normalize, warranting continued caution on the monetary front.

On the real economy, incoming high-frequency indicators, including large-scale manufacturing (LSM), point to economic activity gaining momentum faster than anticipated. Encouragingly, this acceleration is being driven largely by domestic-oriented sectors, signaling improving internal demand and business confidence.

Externally, the MPC highlighted a widening trade deficit, primarily due to a sharp increase in imports—particularly higher import volumes—alongside a decline in exports. Despite this deterioration, the current account deficit has remained relatively contained, supported by resilient workers’ remittances and benign global commodity prices.

Against this backdrop, the Committee assessed that the inflation and current account outlooks remain broadly unchanged from its previous assessment. In contrast, the economic growth outlook has improved significantly, reflecting stronger-than-expected domestic activity.

Balancing these dynamics, the MPC deemed it prudent to maintain the policy rate at its current level, aiming to safeguard price stability while continuing to support sustainable economic growth. The decision underscores a shift from crisis management toward consolidation, with policy now focused on sustaining the recovery without reigniting inflationary risks.

Private Sector Credit and Broad Money Growth on the Rise

Since the last MPC meeting, broad money (M2) growth has picked up to 16.3% by January 9, driven by higher private sector credit and government borrowing.

Private sector credit grew by Rs578 billion during FY26 (up to January 9), supported by easing financial conditions. Key sectors borrowing included textiles, wholesale and retail trade, and chemicals, while consumer financing also continued to rise.

Additionally, the SBP has lowered the average Cash Reserve Requirement for banks from 6% to 5%, which is expected to further boost private sector credit.

https://www.sbp.org.pk/m_policy/2026/MPS-Jan-2026-Eng.pdf