SBP cuts policy rate by 50 basis points to support growth amid contained inflation

The State Bank of Pakistan reduced the policy rate by 50 basis points, effective December 16, citing contained inflation and improving economic activity, while acknowledging persistent risks from the global environment and sticky core inflation.

Announcing the decision after its meeting on Monday, the Monetary Policy Committee (MPC) said average inflation remained within the medium-term target range of 5–7 percent during July–November FY26, supported by relatively benign global commodity prices and anchored inflation expectations.

Although core inflation continues to show rigidity, the MPC assessed that the real policy rate remains adequately positive, creating space to cautiously support sustainable economic growth without undermining price stability.

With economic activity still dull, the SBP appears to be responding to the need for incremental growth support. Importantly, the quantum of the cut is modest suggesting a cautious approach, SBP is signaling flexibility while remaining mindful of inflation risks and external account vulnerabilities, Waqas Ghani Kukaswadia, Research Head of JS Global, noted. The move is positive for Equities and we may see optimism in the stock market tomorrow.

The central bank noted that economic activity is gaining traction, reflected in strong high-frequency indicators and a better-than-expected 4.1 percent year-on-year growth in large-scale manufacturing during Q1-FY26. Based on these trends, real GDP growth for FY26 is expected to remain in the upper half of the projected 3.25–4.25 percent range.

However, the MPC cautioned that the global environment remains challenging, particularly for exports amid evolving trade dynamics.

On the external front, the current account recorded a modest deficit of $0.7 billion during July–October FY26, in line with expectations. While imports increased with economic recovery and remittances stayed resilient, exports came under pressure due to a sharp decline in food shipments, especially rice. Despite subdued financial inflows, SBP’s foreign exchange reserves rose above $15.8 billion following the receipt of $1.2 billion from the IMF, and are projected to reach $17.8 billion by June 2026.

The MPC also highlighted fiscal developments, noting Q1-FY26 surpluses driven by a sizeable SBP profit transfer, though it flagged challenges in achieving revenue targets and the need for tax reforms and SOE privatization. The Committee reiterated that coordinated monetary and fiscal discipline, alongside structural reforms, remains critical to sustaining macroeconomic stability and long-term growth.

Despite the rate cut, the industry was not happy. President of the Korangi Association of Trade and Industry (KATI), Muhammad Ikram Rajput, expressed serious reservations over the State Bank of Pakistan’s Monetary Policy Committee (MPC) decision to reduce the policy rate by just 0.5 percentage points to 10.5 per cent, terming it contrary to the longstanding demands of the business community.

Rajput said the cut was far below expectations and insufficient to accelerate economic growth. He stressed that bringing the policy rate into single digits was essential to revive industrial activity and put the economy back on a sustainable growth path. He noted that the MPC had earlier kept the policy rate unchanged at 11 per cent for seven months since May 2025.

PM calls move positive step for business community, public

Prime Minister Shehbaz Sharif expressed satisfaction over the State Bank of Pakistan’s decision to cut the policy rate by 50 basis points, describing the move as a positive step for the business community and the general public.

In a statement, the prime minister said the decision reflected the improving economic situation and the efforts of the government’s economic team. “By the grace of Allah, the hard work of the government’s economic team is bearing fruit,” he said.

Shehbaz praised Finance Minister Aurangzeb, Minister of State for Finance Bilal Azhar Kayani, the Finance Secretary and their teams for what he termed their commendable efforts towards Pakistan’s economic development.

He said the country had achieved economic stability and was moving in the direction of growth, acknowledging the sacrifices made by the business community and the public to stabilise the economy. “Alhamdulillah, as the economy improves, we are providing as much relief to the people as possible,” he added.

PM said the reduction in the policy rate and the availability of cheaper credit would particularly benefit small and medium-sized enterprises. “Lower interest rates and access to low-cost loans will most benefit small and medium-scale businesses,” he said.