What happened
The State Bank of Pakistan’s (SBP) Monetary Policy Committee kept the policy rate unchanged at 10.5 percent at its meeting on Monday 26 January 2026, according to the State Bank’s Monetary Policy Statement and Dawn’s 26 January 2026 report. Brokerage house Topline Securities called the decision “a surprise” because most market participants had expected a cut. Headline inflation eased to 5.6 percent year-on-year in December 2025, inside the central bank’s 5–7 percent target band, but core inflation steadied at a higher 7.4 percent in H1-FY26 — the level the Committee cited as the central reason to wait.
Why the Committee held
The MPC’s reasoning rested on three developments. Real GDP grew 3.7 percent year-on-year in Q1-FY26 — well above the 1.6 percent posted a year earlier — and large-scale manufacturing recorded year-on-year growth of 8.0 percent in October and 10.4 percent in November. The MPC revised its FY26 growth projection upward to 3.75–4.75 percent.
The external position was mixed. The current account posted a $244 million deficit in December 2025 and a $1.2 billion deficit in H1-FY26, driven by a sharp drop in food exports and rising import volumes. Workers’ remittances and ICT services exports contained the gap, and the SBP’s FX reserves crossed the end-December target to reach $16.1 billion as of 16 January. The MPC projected reserves on track to surpass $18.0 billion by June 2026.
On the fiscal side, the Federal Board of Revenue collected 9.5 percent more tax in H1-FY26 — below last year’s 26 percent pace, leaving a Rs329 billion shortfall. The Committee noted achieving the annual primary surplus target “seems challenging” without sustained fiscal discipline.
What it means for borrowers and the rupee
The hold leaves the SBP’s standing facility corridor at 9.5–11.5 percent and keeps lending rates broadly unchanged. The MPC also announced that the average Cash Reserve Requirement for banks will be reduced from 6.0 percent to 5.0 percent — a liquidity-easing move the Committee said is “expected to increase the private sector credit”. For the rupee, the decision leaves in place the framework the SBP has used to defend recent stability: a positive real policy rate, continued interbank FX purchases, and a managed float. Dawn noted that the prior 50-basis-point reduction to 10.5 percent came in December.
What is still uncertain
Three risks will shape the next move. If core inflation drifts up rather than easing back to the 5–7 percent band, the MPC will face a clear case for holding longer. The SBP’s $18bn-by-June projection assumes workers’ remittances remain strong and planned official inflows land on schedule — both exposed to Gulf labour-market conditions and the IMF programme. And the FBR needs a “steep revenue acceleration” in H2-FY26 to hit its annual target. The next MPC meeting is scheduled for March 2026.
