The State Bank of Pakistan surprised financial markets on Monday by cutting its key policy rate by 50 basis points to 10.5 percent, defying widespread expectations of a pause in the easing cycle.
In a statement issued after the Monetary Policy Committee meeting, the central bank said the new rate would take effect from December 16, 2025. The move marks the first cut after four consecutive meetings where rates were kept unchanged and takes total easing since the peak of 22 percent to 1,150 basis points.
The last reduction of 100 basis points had been announced in the May 05 meeting this year.
Most market participants had expected the SBP to maintain the status quo, citing persistent inflation risks and guidance from the International Monetary Fund. Brokerage houses including Topline Securities and Arif Habib Limited had both forecast no change, pointing to a cautious policy outlook. A Reuters poll of 12 analysts also showed unanimous expectations that rates would remain unchanged.
Inflation outlook and growth signals
Explaining its decision, the MPC said average inflation remained within the 5 to 7 percent target range during July to November FY26, although core inflation continues to show stickiness. The committee added that the broader inflation outlook remains largely unchanged, supported by stable global commodity prices and anchored inflation expectations under a prudent monetary stance.
The central bank also noted signs of improving economic activity. According to the MPC, high frequency indicators suggest momentum is building, with large scale manufacturing posting a stronger than expected increase in the first quarter of FY26. However, it cautioned that the global environment remains challenging, particularly for exports, which could affect the macroeconomic outlook.
Against this backdrop, the committee said there was space to reduce the policy rate while continuing to safeguard price stability and support sustainable growth.
Key developments since last meeting
The MPC highlighted several developments since its October 27 meeting. The Labour Force Survey 2024 to 25 showed a rise in unemployment compared to 2020 to 21, despite faster employment growth. Foreign exchange reserves held by the SBP climbed above $15.8 billion, helped by a $1.2 billion inflow from the IMF following the completion of programme reviews.
Consumer confidence improved, while business confidence softened slightly but remained positive. Fiscal accounts also recorded overall and primary surpluses in the first quarter of FY26, largely due to a sizable SBP profit transfer.
Since the previous meeting, the rupee has strengthened marginally, petrol prices have stayed stable, and global oil prices have fallen by over 6 percent to around $57 per barrel. Headline inflation stood at 6.1 percent year on year in November, while the current account posted a $112 million deficit in October.
