The State Bank of Pakistan kept its benchmark policy rate at 10.5% in January, surprising markets that had expected a cut to 10% following two reductions last year. Headline inflation eased to a three-month low of 5.6% in December, remaining within the 5–7% target range, with the central bank projecting inflation to stay within this range through FY26 and FY27. Economic activity remained robust, with Q1-FY26 GDP rising 3.7% year-on-year, up from 1.6% in the same period last year, driven primarily by industrial and agricultural sectors. GDP growth for FY26 is projected at 3.75–4.75%. On the external front, the current account deficit widened, but steady workers’ remittances and resilient ICT exports helped contain pressures. FX reserves have been building and are expected to exceed $18 billion by FY26-end. The MPC noted the current rate supports price stability and growth, highlighting coordination with fiscal policy and structural reforms.
