By Ayesha Saba

Pakistan’s inflation declined to 5.6% by December 2025, entering the State Bank of Pakistan’s target range, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report indicates that the easing of inflation reflects a combination of improved macroeconomic conditions, moderation in global commodity prices, and effective policy coordination between fiscal and monetary authorities. Lower energy and food prices at the global level, along with better domestic supply conditions, played a key role in easing price pressures during the year.

Exchange rate stability also helped control imported inflation, which had been a major driver of price increases in earlier periods. With external sector pressures easing and foreign exchange reserves strengthening, the pass-through of international price shocks to the domestic economy remained limited.

The SBP highlighted that its calibrated monetary policy approach was central to bringing inflation under control. After maintaining a tight policy stance to curb inflationary pressures, the central bank gradually shifted toward easing as inflation showed a sustained downward trend. This approach helped restore price stability without disrupting the recovery in economic activity.

Fiscal consolidation efforts further supported the disinflation process by reducing demand-side pressures. Improved fiscal discipline, along with better management of public finances, complemented monetary policy and helped anchor macroeconomic stabilization.

Lower inflation has had positive implications for the economy, particularly for households and businesses. It has improved purchasing power, reduced uncertainty, and created a more predictable environment for investment and consumption decisions. For the financial sector, declining inflation has strengthened borrowers’ repayment capacity and improved the real value of financial assets.

The report also notes that easing inflation created space for a reduction in policy rates, which has improved financial conditions across the economy. Lower borrowing costs are expected to support credit demand and economic activity, particularly in interest-sensitive sectors.

However, the SBP cautioned that inflation risks remain, particularly from external factors such as global commodity price volatility and geopolitical tensions. Any resurgence in international prices or disruptions in supply chains could reverse the gains achieved during 2025.

Overall, the decline in inflation to within the target range marks a significant milestone in Pakistan’s economic stabilization efforts, reflecting improved policy effectiveness and a more stable macroeconomic environment going forward.

Credit: INP-WealthPk