SBP's surprise move heightens price pressures: S&P

Pakistan’s central bank surprised markets by cutting its benchmark interest rate by 50 basis points to 10.5% at its December meeting, even as inflation is projected to rise above the official target range in coming months, heightening concerns about price pressures, according to S&P Global Market Intelligence.

The Monetary Policy Committee of the State Bank of Pakistan (SBP) moved against expectations of a hold, as investors had anticipated a pause in light of forecasts showing inflation exceeding the target in the second half of fiscal year 2025-26.

The SBP has warned that inflation is likely to breach the upper bound of the target range for several months in the second half of FY26 before easing back into the range in FY27. Inflation risks remain tilted to the upside, driven by rising fuel and transport costs and mounting input price pressures across the manufacturing sector.

According to the S&P Global Pakistan Manufacturing Purchasing Managers’ Index, input costs rose at the fastest pace in November since February, reflecting higher energy and logistics expenses. While firms have so far absorbed part of these costs, surveys indicate limited pricing power due to constrained consumer demand following last year’s floods.

In a post-meeting briefing, SBP Governor Jameel Ahmad said Pakistan’s external debt servicing requirement for FY26 totals $25.8 billion. Of that amount, $9.7 billion has already been paid or rolled over, while the net repayable obligation for the remainder of the fiscal year stands at $6.9 billion, excluding rollovers.

Ahmad said official inflows are expected to strengthen in the second half of FY26, as government-side inflows have so far reached only $2.1 billion, including disbursements from the International Monetary Fund.

Despite inflation concerns, the central bank expects the current account deficit to remain contained within 0% to 1% of gross domestic product in FY26, with foreign exchange reserves rising to about $17.8 billion by the end of June 2026.

Domestic demand indicators remain supportive. Sales of automobiles, cement and fertilizers have improved, while higher imports of machinery and intermediate goods point to resilient industrial activity. However, weak external demand continues to pose risks to exports.

In agriculture, early indications from wheat acreage, input conditions and incentive schemes suggest production may exceed the official target. On balance, the SBP expects real GDP growth in FY26 to remain near the upper end of its 3.25% to 4.25% forecast range.

S&P Global Market Intelligence said its projections broadly align with the central bank’s assessment but underscored inflation as a key risk. The ratings firm forecasts real GDP growth of 3.2% in FY26, rising to 4.2% in FY27. Inflation is projected at 3.6% in calendar year 2025 before accelerating to 5.3% in 2026, largely in the first half.

S&P also projects a current account deficit of 0.1% of GDP in 2025 and 0.8% in 2026, with foreign exchange reserves rising to about $17.9 billion by the end of 2026.

The outlook remains vulnerable to global commodity price swings, energy tariff adjustments, fiscal slippages and delays in structural reforms under IMF-supported programs, S&P said, warning that any renewed inflation shock could complicate the central bank’s easing cycle.