By Staff Reporter
KARACHI: Pakistan’s central bank on Monday unexpectedly lowered its benchmark interest rate by 50 basis points to 10.5%, defying analyst expectations and recent IMF guidance to hold off on further easing amid risks to inflation and external balances.
The State Bank of Pakistan’s monetary policy committee announced the reduction after keeping the rate steady at 11% for the previous four meetings. The move brings cumulative cuts to 1,150 basis points since the policy rate peaked at 22% in June 2023, following 1,100 basis points of reductions between June 2024 and May 2025.
Inflation eased to 6.1% in November from 6.2% the prior month, staying within the central bank’s 5%-7% target range. Core inflation has remained “relatively sticky,” the committee said in its statement, while headline inflation averaged in the target band from July to November of fiscal 2026. “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 statement said.
The committee cited improving economic activity, with high-frequency indicators showing a stronger-than-expected rise in large-scale manufacturing during the first quarter of fiscal 2026. Sales of automobiles, fertilizer and cement, along with imports of machinery and intermediate goods, “all signal a positive outlook for industrial activity.” In agriculture, data on wheat crop area, input conditions and government incentives suggest production may exceed targets, supporting the services sector.
Real GDP growth is seen in the upper half of the 3.25%-4.25% projected range for fiscal 2026. The external sector showed a $0.7 billion current account deficit from July to October, in line with forecasts, driven by growing imports amid economic recovery and resilient worker remittances. Exports faced pressure from a sharp drop in food shipments, particularly rice. “On the financing side, net inflows remained tepid,” the statement said. “Despite this, SBP’s FX reserves have crossed the December 2025 target of $15.5bn, led by continued FX purchases by the central bank.” Reserves are projected to reach $17.8 billion by June 2026, with the current account deficit expected to stay between 0% and 1% of GDP. Changing trade dynamics could constrain exports, while lower global oil prices may limit import growth.
Fiscal performance improved, with overall and primary balances posting surpluses in the first quarter, aided by sizable profit transfers from the central bank and lower expenditure relative to GDP. Federal Board of Revenue collections grew 10.2% year-on-year from July to November, though acceleration is needed to hit annual targets. Interest payments are anticipated to fall below budget, helping contain the deficit.
The committee stressed the need for structural reforms to expand the tax base and privatize loss-making state-owned enterprises, freeing up resources for investment and social spending. Broad money expanded 14.9% as of Nov. 28, while private-sector credit rose by 187 billion rupees from July to November, led by borrowing in textiles, wholesale, retail and chemicals.
Consumer financing, especially auto loans, stayed robust due to easing conditions, better sentiment and macroeconomic stability. The global backdrop remains challenging, with supportive commodity prices offset by tariff shifts and tight financial conditions. Exports face risks that could impact the industrial outlook. Inflation is forecast to climb above the target range late in fiscal 2026 before easing in 2027, vulnerable to commodity price swings, energy adjustments, fiscal slips and volatility in wheat and perishable food costs.
The decision came despite an IMF staff report last week urging data-dependent policy to anchor expectations and rebuild buffers, following a $1.2 billion disbursement under Pakistan’s loan program. The fund emphasised maintaining “appropriately tight” liquidity, noting the stance’s role in curbing inflation, which dipped to 3% earlier this year.
Prime Minister Shehbaz Sharif welcomed the cut, calling it a “harbinger of … improvement of the business community and the common man.” “By the grace of Allah, the hard work of the government’s economic team is bearing fruit,” Sharif said in a statement, crediting Finance Minister Muhammad Aurangzeb and his team. “There is economic stability in the country and Pakistan is moving towards development.”
Yousuf M Farooq, research director at Chase Securities, described the reduction as “a welcome move,” provided the current account remains contained and the exchange rate absorbs external shocks. “Lower rates should be supportive for equities by lifting valuation multiples and easing financing costs, particularly for leveraged sectors,” Farooq said. “It should also help stimulate domestic demand while reducing the government’s interest expense.” He said the 50 basis-point cut, while modest, signals future policy direction.
Avais Ashraf, research director at AKD Securities, said the lower rate would bolster domestic industry and export competitiveness. “We expect its impact on trade imbalance to remain manageable as food supplies improve,” Ashraf said, attributing recent trade pressures to monsoon floods disrupting supplies. “Higher food imports and lower food exports exert pressure on [the] current account that remain manageable given robust remittances and manageable interest payments,” he said, flagging rising auto imports despite financing curbs. Topline Securities termed the move a “surprise” in an X post, having anticipated no change after four straight holds. The last cut, of 100 basis points, occurred on May 5, 2025.
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