The State Bank of Pakistan (SBP) has decided to keep its benchmark policy rate unchanged at 10.5%, effective January 27, 2026, following its scheduled meeting of the Monetary Policy Committee (MPC). At the same time, the central bank reduced the Cash Reserve Requirement (CRR) by 100 basis points to 5%, signaling a measured easing of monetary conditions.

The MPC noted that headline inflation stood at 5.6% year-on-year in December 2025, broadly in line with expectations and within the central bank’s target range. While core inflation remains elevated at around 7.4%, easing inflation expectations among households and businesses suggest improving confidence in macroeconomic stability.

Recent high-frequency indicators point to a stronger-than-expected pickup in economic activity, led mainly by domestic-oriented sectors. Manufacturing, construction, and consumer demand have shown notable improvement, reinforcing the MPC’s view that growth momentum is becoming increasingly broad-based.

Despite a widening trade deficit driven by higher imports and softer food exports, particularly rice, the overall external position has remained manageable. Strong workers’ remittances, rising ICT services exports, and favorable global commodity prices have helped offset external pressures. As a result, foreign exchange reserves increased to $16.1 billion by mid-January, exceeding earlier targets and supported by continued interbank market purchases by the SBP.

Given these developments, the MPC maintained that its outlook for inflation and the external account remains largely unchanged, while the growth outlook has improved materially. The Committee therefore judged it appropriate to maintain the policy rate to consolidate economic gains and support sustainable growth.

Provisional data shows that real GDP expanded 3.7% YoY in 1QFY26, compared to 1.6% in the same period last year, driven by strong performance in the industrial and agricultural sectors. Momentum has continued into the second quarter, with large-scale manufacturing growing 8.0% in October and 10.4% in November 2025, lifting cumulative LSM growth to 6.0% during July–November FY26.

Rising auto sales, cement dispatches, fertilizer offtake, POL sales (excluding furnace oil), and higher imports of machinery and intermediate goods point to sustained domestic demand. Improved prospects for the wheat crop are also expected to support services-sector activity.

Reflecting these trends, the MPC revised its FY26 GDP growth projection upward to 3.75–4.75%, with further strengthening expected in FY27 as the effects of earlier policy easing and macroeconomic stabilization take hold.

The current account recorded a $244 million deficit in December 2025, taking the cumulative deficit to $1.2 billion in 1HFY26. Looking ahead, the SBP expects the current account deficit to remain contained within 0–1% of GDP in FY26. With planned official inflows and continued remittance growth, foreign exchange reserves are projected to exceed $18 billion by June 2026.

On the fiscal front, FBR revenues increased 9.5% YoY in 1HFY26, though below target. However, lower interest payments and controlled expenditures have supported fiscal consolidation. The MPC emphasized the need for sustained fiscal discipline, including structural reforms, tax base expansion, and SOE privatization.

Meanwhile, broad money growth rose to 16.3%, supported by higher private-sector credit and government borrowing. The reduction in CRR is expected to further encourage bank lending and private-sector activity.

Headline inflation has moderated due to easing food prices, while energy inflation edged up as favorable base effects faded. Despite elevated core inflation, the MPC expects overall inflation to remain within the 5–7% target range in FY26 and FY27, with only temporary near-term pressures.

Overall, the MPC reaffirmed that maintaining a positive real policy rate, alongside coordinated fiscal policy and productivity-enhancing reforms, will be critical to sustaining growth, boosting exports, and preserving macroeconomic stability over the medium term.