Short Description: Pakistan’s central bank surprises markets by holding its key interest rate at 10.5%, prioritizing inflation control over business demands for a cut.
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Main Article:
In a move that defied market expectations, Pakistan’s central bank, the State Bank of Pakistan (SBP), has opted to maintain its benchmark interest rate at 10.5%. The bank’s Monetary Policy Committee (MPC) decided against a widely anticipated 0.5 to 1 percentage point cut, signaling a continued focus on price stability. The decision comes despite promising headline inflation and improving economic growth projections.
The MPC acknowledged that headline inflation of 5.6% year-on-year in December 2025 was within expectations. However, it pointed to persistent core inflation hovering around a higher 7.4% and a widening trade deficit driven by surging imports as key concerns. The committee emphasized that the real policy rate remains positive, which is crucial for anchoring inflation within the medium-term target range of 5-7%. Concurrently, the outlook for economic growth has brightened significantly, with real GDP growth hitting 3.7% year-on-year in Q1 of FY26, led by strong performances in industry and agriculture. Consumer and business confidence are also on the rise.
SBP Governor Jamil Ahmed provided further context, forecasting GDP growth of 3.75-4.75% for FY26. He highlighted robust forex reserves, which have surpassed targets to reach $16.1 billion, with an aim to hit $20.2 billion by year-end. This bolstered reserve position is deemed sufficient to meet the country’s external debt obligations, which total $25.7 billion for the fiscal year. Governor Ahmed noted that Pakistan’s total external debt has plateaued at $101 billion since 2021, with a healthier shift away from short-term borrowing. The MPC concluded that maintaining the current monetary policy stance is prudent to balance growth support with the imperative of ensuring sustainable price stability.
Short Summary:
The State Bank of Pakistan held its policy rate steady at 10.5%, prioritizing inflation control over a market-expected cut. While economic growth is improving and forex reserves are strong, elevated core inflation and a widening trade deficit informed the cautious stance. The decision underscores the central bank’s commitment to price stability as the foundation for sustainable long-term growth.
