The State Bank of Pakistan (SBP) on Monday unexpectedly reduced its key policy rate by 50 basis points to 10.5 per cent, despite rising food-driven inflation and ongoing external sector considerations.
The decision marked a departure from the central bank’s recent stance, as the Monetary Policy Committee (MPC) had maintained the status quo in its previous four meetings. The last rate cut came in early May, when the SBP lowered the benchmark rate by 100 basis points to 11 per cent.
Market participants had largely anticipated no change in the December policy decision. Headline inflation has risen gradually in recent months, increasing from 4.1 per cent in July to 6.1 per cent in November, mainly due to supply disruptions in food items following widespread floods.
📢 Monetary Policy Committee has decided to decrease the policy rate by 50 basis points to 10.5 percent w.e.f. December 16, 2025.#SBPMonetaryPolicy
— SBP (@StateBank_Pak) December 15, 2025According to AHL, near-term inflationary pressures could intensify due to seasonal factors such as Ramazan and Eid in the second half of FY26, potentially pushing monthly inflation higher.
Read: SBP Expected to Keep Interest Rate Unchanged in Monetary Policy Decision
However, analysts expect full-year inflation for FY26 to remain within the SBP’s medium-term target range of 5 to 7 per cent, even if temporary spikes occur. On this basis, several market observers believe further easing may pause until the next fiscal year, beginning in July 2026.
The International Monetary Fund (IMF) echoed this view in its latest staff report, released last week. The IMF stressed that monetary policy must remain sufficiently tight and data-driven to keep inflation within target, while commending the SBP’s cautious approach in managing inflation risks amid volatile conditions.
