State Bank holds monetary policy rate at 10.5%

Governor announces the inflation outlook will stay between 5-7%

State Bank of Pakistan (SBP) Governor Jameel Ahmad announced on Monday that the monetary policy would be maintained at the current level of 10.5% for the next one and a half months.

Addressing a press conference in Karachi, Ahmad also announced a reduction in the rate for banks to deposit cash by 1%, setting it at 5%.

The Monetary Policy Committee has decided to keep the policy rate unchanged at 10.5 percent in its meeting held on January 26, 2026.
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— SBP (@StateBank_Pak) January 26, 2026

He added that the inflation outlook was going to stay between 5-7% going into 2027, explaining that inflation expectations were easing and confidence among consumers and businesses was improving, adding that the decision to maintain the policy rate aimed to support economic stability and sustained growth.

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The SBP governor said recent high-frequency indicators, including large-scale manufacturing data, suggested economic activity was expanding faster than anticipated. He said economic growth was projected to range between 3.75-4.75% in the current fiscal year.

He noted that while imports had increased, widening the trade deficit, the current account deficit remained manageable. Ahmad said the current account deficit stood at $244 million in December 2025 and totalled $1.2 billion in the first half of the current fiscal year, supported by higher remittances and ICT exports.

The accompanying press release of the SBP's Monetary Policy Committee (MPC) noted: "The outlooks for inflation and the current account are broadly unchanged from its previous assessment, while the outlook for economic growth has improved significantly. Based on this, the committee deemed it prudent to hold the policy rate unchanged at the current level to ensure price stability and support sustainable economic growth."

The MPC said that headline inflation eased to 5.6% in December from 6.1% in November, amidst a moderation in food prices, notwithstanding the sharp uptick in wheat and allied product prices. Meanwhile, energy inflation increased, mainly due to the fading of the favourable base effect in electricity tariffs. 

The governor further said that foreign exchange reserves stood at $16.1b and were expected to exceed $18b by June. He said the bank also reported a significant rise in private sector credit, with net borrowing increasing by Rs578b, reflecting improved business confidence.

Regarding fiscal performance, the governor said: “FBR revenue in December rose by 7.3% but fell short of the target, creating a shortfall of Rs329b.”

Regarding global conditions, Ahmad said the International Monetary Fund had slightly improved its global growth forecast for 2026, but trade uncertainties and commodity price fluctuations remained risks.

Noting other key developments since its last meeting, the MPC said real GDP growth was provisionally reported at 3.7% for the first quarter of the current fiscal year, mainly led by the industry and agriculture sectors. "Second, both consumer and business confidence improved, whereas inflation expectations of these stakeholders eased," it added.

In view of these developments, the MPC assessed the "real policy rate to be adequately positive to stabilise inflation within the target range of 5-7% over the medium term".

However, it pointed out that the outlook was subject to risks emanating from volatility in global commodity and domestic wheat prices, unanticipated adjustments in administrative energy prices and a sharper-than-assumed pickup in domestic demand.

The MPC also emphasised the need for "coordinated and prudent monetary and fiscal policy mix — as well as productivity-enhancing structural reforms — to increase exports and achieve high growth on a sustainable basis".

The decision to hold the policy rate comes against expectations that the bank might bring it back into single-digit territory.

Market sentiment had pointed to a strong expectation of easing. Arif Habib Limited 's pre-Monetary Policy Statement survey had showed that 43.5% of participants expected a 75 basis points cut, 39.1% anticipated a 50bps reduction and only 17.4% expected no change, indicating a broad consensus in favour of a rate cut.

The case for easing was underpinned by improving high-frequency and macroeconomic indicators, according to Shankar Talreja, Director of Research at Topline Securities. A Topline Economy Alert dated January 20, 2026, showed Pakistan's economic momentum strengthening in December 2025, driven by improved performance across key real-economy sectors.