Qudsia Bano

The State Bank of Pakistan’s Monetary Policy Committee (MPC) on Monday cut the policy rate by 50 basis points, effective December 16, 2025, citing contained inflation, improving economic activity, and sufficient space to support sustainable growth while preserving price stability.

In its Monetary Policy Statement, the MPC said inflation, on average, remained within the target range of 5 to 7 percent during July–November FY26, although core inflation continued to exhibit some stickiness. The Committee assessed that the overall inflation outlook remains broadly unchanged, supported by relatively benign global commodity prices and well-anchored inflation expectations under a prudent monetary policy stance.

The decision came amid signs of strengthening economic activity. The MPC noted a robust improvement in key high-frequency indicators, including a higher-than-anticipated increase in large-scale manufacturing during the first quarter of FY26. However, it cautioned that the global environment remained challenging, particularly for exports, which could weigh on the broader macroeconomic outlook.

Despite these external risks, the Committee said there was adequate room to reduce the policy rate while maintaining price stability. It assessed that the real policy rate remains sufficiently positive to keep inflation within the medium-term target range and to support sustainable economic growth.

The MPC also reviewed several key developments since its previous meeting. According to the Labour Force Survey 2024–25, the unemployment rate has increased compared to 2020–21, even as employment growth accelerated relative to the previous survey. This dynamic highlights ongoing structural challenges in the labour market despite improving economic conditions.

On the external front, the Committee took note of an improvement in Pakistan’s foreign exchange position. Despite sizable ongoing debt repayments, the State Bank’s foreign exchange reserves rose to above $15.8 billion, supported by the receipt of $1.2 billion from the International Monetary Fund following the successful completion of reviews under the Extended Fund Facility and the Resilience and Sustainability Facility.

Domestic sentiment indicators showed mixed but generally positive trends. Recent SBP–IBA surveys pointed to an improvement in consumer confidence, while business confidence, though still positive, moderated slightly. Fiscal performance also strengthened during the first quarter of FY26, with both overall and primary balances posting surpluses. The MPC attributed this outcome largely to a sizable profit transfer from the central bank.

Looking ahead, the Committee stressed the importance of continued coordination between monetary and fiscal authorities, reaffirming that a prudent and disciplined policy mix remains essential to safeguard macroeconomic stability, manage external and domestic risks, and support durable economic growth in a fluid global environment marked by evolving trade dynamics and tight financial conditions.

Credit: INP-WealthPk