Islamabad, 26-Jan-2026 (PPI): Pakistan’s central bank held its key policy rate steady on Monday, citing significant economic pressures from a widening trade deficit and a substantial shortfall in tax revenue, which overshadowed a markedly improved outlook for economic growth.
The Monetary Policy Committee (MPC) of the State Bank of Pakistan decided to maintain the policy rate at 10.5 percent, noting that while headline inflation was in line with expectations, a number of underlying challenges required a prudent approach to ensure stability.
In its statement, the Committee observed that headline inflation eased to 5.6 percent year-on-year in December 2025. However, it expressed concern that core inflation has remained persistently high, steadying at around 7.4 percent in recent months.
Despite these inflationary pressures, the MPC highlighted a significant acceleration in economic activity, with real GDP growing by 3.7 percent in the first quarter of fiscal year 2026 (Q1-FY26). This performance, led by industry and agriculture, prompted an upward revision of the full-year growth projection to a range of 3.75 to 4.75 percent. High-frequency indicators, including large-scale manufacturing, auto sales, and cement dispatches, suggest this momentum continued into the second quarter.
On the external front, the current account deficit reached $1.2 billion in the first half of FY26, primarily driven by a widening trade gap. The committee noted this was due to a substantial increase in import volumes and a concurrent decline in exports, particularly a sharp drop in food shipments.
Resilient workers’ remittances and growth in ICT services exports helped contain the deficit. This has allowed the SBP to bolster its foreign exchange reserves, which surpassed the end-December target to reach $16.1 billion as of January 16. The central bank anticipates reserves will exceed $18.0 billion by June 2026.
The fiscal sector presented a mixed picture. Federal Board of Revenue (FBR) tax revenues grew by 9.5 percent in the first half of the fiscal year, a significant deceleration from the 26 percent recorded in the same period last year. This resulted in a revenue shortfall of Rs329 billion against the target. While contained government expenditures have improved the overall fiscal balance, the committee noted that achieving the annual primary surplus target appears "challenging."
In the monetary domain, broad money (M2) growth accelerated, driven by an expansion in private sector credit amounting to Rs578 billion so far in FY26. To further encourage lending, the SBP announced a reduction in the average Cash Reserve Requirement for banks from 6.0 to 5.0 percent.
Looking ahead, the MPC projects inflation to stabilise within the target range of 5 to 7 percent over the medium term but acknowledged risks from global commodity prices and potential adjustments in domestic energy tariffs. The Committee concluded by emphasizing the need for a coordinated policy mix and structural reforms, such as broadening the tax base and privatising loss-making state-owned enterprises, to achieve sustainable high growth.