Pakistan’s Central Bank Cuts Policy Rate Amid Economic Optimism

Karachi: The State Bank of Pakistan (SBP) has reduced its policy rate by 50 basis points to 10.50%, surprising many who anticipated rates would remain unchanged. This decision, announced by the Monetary Policy Committee (MPC), reflects optimism about the country’s economic trajectory in the second half of fiscal year 2026.

According to the MPC, inflation has remained within the target range of 5-7% during the first five months of FY26. The committee noted the strengthening of economic activity and identified room to lower the policy rate to bolster sustainable growth. The SBP projects GDP growth to be in the upper half of the 3.25%-4.25% range for FY26.

The SBP Governor provided insights into the country’s external debt situation, revealing that debt repayments for FY26 total $25.8 billion, with $9.7 billion already paid or rolled over. The remaining net repayable amount is $6.9 billion, excluding rollovers.

In terms of foreign reserves, the SBP aims for $17.8 billion by June 2026. As of December 12, 2025, reserves stood at $15.8 billion, surpassing the December 2025 target of $15.5 billion.

The SBP remains optimistic about improved financial inflows in the latter half of FY26. By mid-December, government inflows were $2.1 billion, including $1.2 billion from the International Monetary Fund. The governor expects all planned government inflows to materialize in the second half of the fiscal year.

Regarding foreign exchange interventions, the SBP Governor noted an increase in activity, which had been subdued in the early months of FY26 but has since aligned with last year’s average.

The MPC anticipates inflation will exceed the 7% upper target temporarily in the second half of FY26, before returning to the 5-7% target range in FY27.