Surprise move: SBP lowers policy rate to 10.5% with 50bps reduction

Contrary to market expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided to reduce the policy rate by 50 basis points (bps) to 10.5% on Monday.

The market expected the central bank to maintain the status quo.

“The MPC has decided to decrease the policy rate by 50bps to 10.5% w.e.f. December 16, 2025,” the central bank said.

The latest reduction takes the total easing since rates peaked at 22% to 1,150 basis points. The policy rate had remained unchanged for four consecutive meetings before Monday’s move.

Last cut of 100bps was announced in the May 05, 2025, meeting.

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The MPC, in its statement, noted that inflation on average remained within the target range of 5–7% during July-November FY26, though core inflation is proving to be relatively sticky.

“On balance, the inflation outlook remains broadly unchanged, mainly owing to the relatively benign global commodity prices and anchored inflation expectations, amidst a prudent monetary policy stance.

“The committee also assessed that economic activity continues to gain traction, based on robust improvement in key high-frequency indicators, including a higher-than-anticipated increase in large-scale manufacturing in Q1- FY26.

“Nonetheless, the committee noted that the global environment remains challenging, particularly for exports, which may have some implications for the macroeconomic outlook. In this backdrop, while ensuring the ongoing price stability, the MPC noted the available space to reduce the policy rate to support sustainable economic growth,” read the statement.

The MPC noted the following key developments since its last meeting.

“First, the Labor Force Survey 2024-25 points to an increase in the unemployment rate from 2020-21, notwithstanding the faster growth in employment as compared to the previous survey.

“Second, despite sizable ongoing debt repayments, SBP’s FX reserves continued to increase, reaching above $15.8 billion with the receipt of $1.2 billion from the International Monetary Fund (IMF) after the successful completion of the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) reviews.

“Third, as per the latest SBP-IBA surveys, consumer confidence improved, while business confidence – though remaining positive – moderated slightly.

“Fourth, led by sizable SBP profit transfer, the overall and primary fiscal balances recorded surpluses during Q1-FY26.

“Lastly, the global environment remains fluid, characterised by generally supportive commodity prices, but also evolving tariff-related dynamics and challenging financial conditions.”

The MPC assessed that the real policy rate remains adequately positive to stabilise inflation within the target range of 5 – 7% over the medium term and contribute towards sustainable economic growth.

Inflation outlook

The MPC noted that headline inflation remained within its medium-term target range over the past three months.

However, the MPC continues to expect that inflation may rise above its target range towards the end of FY26 due to the low base effect from last year, before reverting to the target range in FY27.

At its previous meeting on October 27, 2025, the MPC had decided to keep the policy rate unchanged at 11%, saying that the impact of the recent floods on the broader economy was lower than anticipated. This had been in line with market expectations.

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Market expectations defied

Market experts had widely expected the central bank to maintain the status quo.

“This came as a surprise in our view as the majority of the participants were expecting rates to remain unchanged,” said Topline Securities.

Arif Habib Limited (AHL), another brokerage house, had anticipated no change in the policy rate, noting that “maintaining stability while adopting a cautious stance as the base effect that had been keeping headline inflation low is now fading”.

“The slight widening of the current account deficit and the early stage of domestic economic recovery further support a prudent, wait-and-see approach from the central bank,” said AHL.

Similarly, a Reuters poll had found that the central bank would keep its key interest rate unchanged, as analysts push back rate-cut forecasts to late 2026 after the IMF warned inflation risks persist and policy must stay “appropriately tight”.

All 12 analysts surveyed expected no cut in the policy meeting.

Most respondents believed that the SBP would not begin easing until the closing months of FY26, which ends in June 2026, with some analysts pushing forecasts for the first cut into fiscal year 2027, said the report.

Previous meeting

In its last meeting (Oct 27) the committee had noted that headline inflation rose significantly to 5.6% in September, whereas core inflation remained unchanged at 7.3%.

Since the last MPC meeting, several key economic developments have occurred.

The rupee has appreciated by 0.2%, while petrol prices have remained largely unchanged.

Internationally, oil prices have reduced by over 6% since the last MPC, hovering around $57 per barrel.

Pakistan’s headline inflation clocked in at 6.1% on a year-on-year (YoY) basis in November 2025, according to Pakistan Bureau of Statistics (PBS) data.

In addition, Pakistan’s current account posted a deficit of $112 million in October 2025, data released by the SBP showed.

SBP-held foreign exchange reserves rose to $14.58 billion as of December 5, 2025, the central bank said.

Net foreign reserves held by commercial banks stood at $5.03 billion, taking the country’s total liquid foreign reserves to $19.61 billion.