ISLAMABAD: The State Bank of Pakistan (SBP) on Monday announced a 50 basis points reduction in its policy rate, bringing it down to 10.5%, effective from December 16, 2025. The decision comes as part of the central bank’s ongoing efforts to ensure price stability while fostering sustainable economic growth amidst a challenging global environment.
In a statement, the SBP’s Monetary Policy Committee (MPC) noted that inflation had remained within the 5-7% target range on average during the first five months of the 2026 fiscal year (July-November FY26), although core inflation remained “relatively sticky.” Despite this, the MPC indicated that inflation expectations were firmly anchored, largely due to a stable global commodity price environment and prudent monetary policy.
The MPC highlighted a positive trajectory for economic activity, pointing to a higher-than-expected growth in large-scale manufacturing during Q1-FY26 as a key indicator. However, the committee also acknowledged the challenges posed by the global environment, particularly in relation to exports, which could have implications for the macroeconomic outlook.
The MPC emphasized that, while maintaining price stability was crucial, the current economic environment allowed for a reduction in the policy rate. This move, it said, aimed to support the country’s sustainable growth without compromising on inflation control.
Further, the committee noted several developments since its previous meeting in May, including rising unemployment, an increase in foreign exchange reserves, and notable debt repayments. It also observed an uptick in consumer confidence, although business sentiment had shown signs of moderation.
The committee reported a surplus in both overall and primary fiscal balances during Q1-FY26, driven largely by a sizable transfer of profits from the SBP. Despite this positive fiscal performance, it cautioned that global economic conditions remained fluid, with evolving trade dynamics, tariff-related changes, and challenging financial conditions.
Yousuf M Farooq, Research Director at Chase Securities, termed the 50bps rate cut as a “welcome move,” provided the current account remains manageable and the exchange rate continues to act as a buffer against external shocks. Farooq also noted that lower rates could support equities by improving valuation multiples and easing financing costs, particularly in leveraged sectors.
Meanwhile, AKD Securities Research Director Avais Ashraf predicted that the rate cut would boost domestic industries and enhance the competitiveness of exports. He highlighted that the recent surge in trade imbalance was due to disruptions in food supplies, caused by heavy monsoon rains and floods earlier in the year. Ashraf expressed concerns over rising automobile imports, despite government restrictions on financing terms.
Topline Securities noted that the rate reduction was a surprise, as many analysts had expected the SBP to maintain the status quo. The last policy rate cut of 100bps was announced in May 2025, and since then, the benchmark rate had been held steady at 11%, despite headline inflation dipping to 3% earlier in the year. Inflation in November was recorded at 6.1%, slightly down from 6.2% in October.
The International Monetary Fund (IMF), which had advised the SBP to maintain tight liquidity, welcomed the move, saying the policy stance should remain data-dependent to anchor inflation expectations. The IMF also noted that maintaining positive real interest rates was essential for reducing inflation and rebuilding external buffers.
Before the MPC’s decision, industrial leaders had expressed concerns over high interest rates, calling for reductions to help them remain globally competitive. The latest rate cut is seen as a response to these demands, offering relief to industries and businesses that have been struggling with financing costs amid the global economic slowdown.