Pakistan policy rate at three-year low on steady inflation, economic growth

Pakistan's central bank has brought the policy rate to the lowest level since March 2022 due to steady inflation and economic growth.

The State Bank of Pakistan (SBP) Monetary Policy Committee on Monday decided to cut the key policy rate by 50 basis points (bps) to 10.5% after keeping the interest rate unchanged in four consecutive meetings since May.

This time as well, the market had expected the rate to be maintained. However, the Monetary Policy Committee decided to slash it in a decision that surprised analysts.

In its statement, the committee noted the inflation on average remained within the target range of 5-7% from July to November.

The committee kept its inflation outlook "unchanged" due to lower global commodity prices and a "prudent monetary policy stance".

Earlier this month, the International Monetary Fund (IMF) projected that Pakistan's inflation could rise to 6.3% this year compared to the previous estimate of 4.5%. By June 2026, inflation may reach 8.9%, compared with 3.2% in June this year.

Waqas Ghani, head of research at JS Global Securities, said the SBP appears to be responding to the need for incremental growth support as the economic activity remains dull.

Importantly, the quantum of the cut is modest, suggesting a cautious approach. The central bank is signaling flexibility while remaining mindful of inflation risks and external account vulnerabilities, he added.

"The move is positive for equities and we may see optimism in the stock market tomorrow."

Improve macroeconomic indicators

The committee also noted growth in large-scale manufacturing during the first quarter of the ongoing fiscal year, higher employment numbers, strong FX reserves, and improved consumer confidence provided space for a policy rate cut.

The statement added that LSM registered a 4.1% year-on-year growth in Q1-FY26, while sales of automobiles, fertilizer, and cement have remained positive. These positive developments, the committee said, are expected to keep real GDP growth for FY26 in the projected range of 3.25-4.25%.

On the external front, the central bank said the current account deficit stood at $0.7 billion during July-October, in line with the anticipation.

"Imports continued to grow in line with improving economic activity, whereas workers’ remittances remained resilient," the committee noted.

"Going forward, global headwinds, especially from evolving trade dynamics, are likely to constrain exports, though lower global oil prices may contain import growth."

The central bank kept its assessment for the current account unchanged at 0-1% percent of GDP in FY26.