Pakistan’s State Bank Keeps Interest Rate Steady at 10.5%

The State Bank of Pakistan (SBP) has decided to maintain its benchmark policy interest rate at 10.5% in the first Monetary Policy Committee (MPC) meeting of 2026. This decision was announced by Governor Jameel Ahmad during a press conference.

Inflation projections for Pakistan over the current year’s second half indicate it could surpass 7%, according to SBP Governor Jameel Ahmad. The governor also provided an outlook for Pakistan’s gross domestic product (GDP), predicting growth between 3.75% and 4.75% in the coming year.

In December 2025, the MPC had reduced the policy rate by 50 basis points to 10.5%, following market expectations that the central bank would cut rates further due to declining inflation levels, improving external stability, and falling bond yields. However, SBP’s decision was contrary to these expectations.

Market experts anticipated a 75-basis-point reduction, pushing the policy rate to 9.75%. The Arif Habib Limited (AHL) had speculated that such a cut would mark “a long-awaited return to single-digit territory.” Similarly, Topline Securities expected an unchanged rate with only a 50-basis-point cut. A Reuters poll forecasted a reduction of up to 75 basis points.

These expectations stemmed from lower-than-expected inflation figures in the last two months and improved remittance flows. Additionally, analysts attributed these shifts to largely stable PKR/USD parity. Despite the positive economic indicators, business leaders called for further rate cuts, citing persistently high borrowing costs and energy prices negatively impacting industrial output and export competitiveness.

In a statement, Saqib Fayyaz Magoon, Chairman of the Businessmen Panel Progressive (BMPP) and Senior Vice President of the Federation of Pakistan Chambers of Commerce & Industry (FPCCI), emphasized the need for rate reductions. He stressed that bringing the policy rate to single digits could provide immediate relief to the business community.

Back in December 2025, the MPC had reduced the policy rate by 50 basis points. They noted inflation remained within their target range of 5–7% during July-November FY26 and attributed economic activity gains to robust manufacturing improvements. Since then, several key developments have occurred. The rupee appreciated slightly, while petrol prices declined. International oil prices surged over 7%, hovering around $61 per barrel.

Pakistan’s headline inflation stood at 5.6% on a year-on-year basis in December 2025, aligning with the Ministry of Finance’s estimate of 5.5-6.5%. The country’s current account deficit was $244 million in December 2025, compared to the original reported surplus of $100 million and a $454 million surplus in December 2024.

The SBP announced that foreign exchange reserves had increased by $16 million, bringing total reserves up to $16.09 billion as of January 16, 2026. This includes total liquid foreign reserves valued at $21.26 billion and net foreign reserves held by commercial banks amounting to $5.17 billion.

These developments highlight the complex interplay between economic indicators, inflation rates, and policy decisions that influence the SBP’s decision-making process.