The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) resolved to reduce the policy interest rate by 50 basis points, bringing it down to 10.5 percent, effective December 16, 2025. This decision marks a shift from the previous stance where the policy rate had been maintained at 11 percent for several meetings earlier in 2025.
Decision Context
- The MPC decision was contrary to market expectations, as recent analyst surveys and Reuters polling had largely forecasted a hold at 11 percent, reflecting caution due to persistent inflation risks and guidance from international partners.
- Recent inflation metrics showed a slight moderation, with headline inflation at 6.1 percent in November 2025, marginally down from 6.2 percent in October, and within the SBP’s informal target corridor.
- The move continues the broader easing cycle that has reduced the policy rate significantly from earlier highs, reflecting a moderation of inflation pressures and the need to support economic activity.
Macroeconomic Rationale
The MPC’s rate cut reflects a data-dependent, cautious easing approach with the following considerations:
- Inflation trajectory: Slowing inflation, albeit with potential volatility ahead due to food and transport price dynamics, provided space for a measured reduction in borrowing costs.
- Economic growth concerns: Signs of slowing economic activity and credit growth were cited as factors underpinning the need to ease the monetary stance to support investment and demand.
- External conditions: Engagement with the International Monetary Fund (IMF) and broader external sector stability continued to influence the policy framework, with emphasis on maintaining positive real interest rates while enabling tentative accommodation.
Implications for Financial and Real Sectors
- Banking sector: A lower policy rate typically translates into lower short-term funding costs, with potential downward pressure on lending rates over the medium term.
- Credit markets: Easing monetary conditions may stimulate credit demand, though transmission to broader lending rates will depend on banks’ risk assessment and liquidity conditions.
- Investment and growth: Reduced borrowing costs are expected to ease financing constraints for businesses, particularly in sectors sensitive to interest rates, and potentially support capital formation.
Forward Outlook
The MPC’s decision underscores a calibrated shift toward monetary easing in response to evolving macroeconomic indicators. Future policy adjustments will remain contingent on inflation dynamics, growth signals, and external sector developments. Analysts will closely monitor upcoming inflation prints, fiscal performance, and external balances to gauge the trajectory of monetary policy going into 2026.
Summary of Policy Change
- Policy rate prior to decision: 11.0%
- Revised policy rate: 10.5%
- Change: –50 basis points
- Effective date: December 16, 2025
