Breaking: Pakistan’s central bank tipped to ease policy rate as inflation cools
Table of Contents
- 1. Breaking: Pakistan’s central bank tipped to ease policy rate as inflation cools
- 2. Key facts at a glance
- 3. Evergreen context: why easing follows inflation relief
- 4. What to watch next
- 5. A 50‑bp Cut
- 6. SBP’s Anticipated 50‑bp Rate Cut on Jan 26: Why Inflation Relief and Stronger FX Buffers Matter
- 7. 1. Inflation Trajectory Leading Up to the Cut
- 8. 2. FX Buffers and the Pakistani Rupee’s Recent strength
- 9. 2.1 Reserve Build‑Up
- 10. 2.2 Exchange‑Rate Dynamics
- 11. 3. Monetary‑Policy Mechanics behind a 50‑bp Cut
- 12. 3.1 Policy‑Rate Timeline (2022‑2025)
- 13. 3.2 why 50 bp, Not 25 bp?
- 14. 4. Expected Ripple Effects Across the Economy
- 15. 4.1 Credit Growth
- 16. 4.2 bond‑Market reaction
- 17. 4.3 Consumer Spending
- 18. 5. Practical Tips for Stakeholders
- 19. 5.1 For Investors
- 20. 5.2 For Businesses
- 21. 5.3 For Policy‑analysts
- 22. 6. real‑World Case Study: The 2023 “Rate‑Stability” Episode
- 23. 7.FAQs (Search‑friendly Snippets)
Islamabad — The State Bank of Pakistan’s Monetary Policy committee is set to convene on January 26, with a Reuters poll indicating most analysts expect a 50-basis-point cut to the policy rate.The move would mark another step in the central bank’s ongoing easing cycle after a period of aggressive tightening.
In the survey of 10 analysts, seven anticipate a 50 bps reduction, two predict a deeper 75 bps cut, and one foresees no change. The median projection also points to a 50 bps cut, which would bring the policy rate to 10.5% if implemented. The trajectory signals a clear shift away from the peak of 22% reached in 2023 as part of an extended tightening cycle, with ample easing already front-loaded since mid-2024.
Proponents of a 50 bps step cite softer inflation, stronger foreign exchange reserves, and a healthier balance of payments as justification for a measured easing, while caution remains due to persistent core inflation and geopolitical risk. Market watchers say the betterment in external buffers provides room for growth support,even as food-price dynamics ease remains uneven.
Analysts at JS Global Capital highlighted that inflation has cooled modestly and external conditions have strengthened,reinforcing the case for policy easing though non-food inflation remains a concern. Others argue the macro backdrop now warrants more decisive action, perhaps propelling Pakistan toward a single-digit policy rate.
Despite the optimism, some participants advise patience. Geopolitical tensions and their potential impact on fuel prices argue for a cautious pace,with one firm set to hold rates until mid-year. The spectrum of views underscores a delicate balance between stimulating growth and preventing renewed price pressures.
The December inflation print showed a slowdown to 5.6% year-on-year, with prices retreating month-on-month due to lower costs for perishable foods, even as non-food inflation stays comparatively elevated. The SBP has noted inflation hovered near the 5–7% target range from July through November but warned core inflation remains sticky and that headline inflation could temporarily rise toward the end of the fiscal year on base effects.
meanwhile, the International Monetary Fund has cautioned against premature monetary easing under Pakistan’s $7 billion loan program, underscoring the need for continued vigilance in sequencing policy actions with the broader reform program.
Key facts at a glance
| Event | Monetary Policy Committee meeting |
|---|---|
| Date | January 26 |
| Analyst consensus | 50 bps cut (7 of 10); 2 expect 75 bps; 1 expects hold |
| Projected rate after move | 10.5% |
| Peak rate (2023) | 22% |
| Cumulative cuts since mid-2024 | Approximately 11.5 percentage points |
| December inflation | 5.6% year-on-year; monthly decline |
| IMF stance | Cautions against premature easing under the $7B loan program |
Evergreen context: why easing follows inflation relief
When price pressures retreat, central banks commonly pivot from tightening to easing to sustain growth while keeping inflation in check. For Pakistan, a softer inflation path and stronger foreign exchange cushions underpin the case for gradual policy loosening. Yet the path remains tethered to core inflation dynamics, external risks, and the effectiveness of reforms tied to international financing. This pattern—easing after inflation moderation with prudent risk management—appears across emerging economies as policymakers calibrate stimulus with credibility.
What to watch next
Investors and consumers should monitor whether the SBP confirms the anticipated easing on January 26, how inflation and growth data evolve in the quarters ahead, and the IMF program’s guidance on policy sequencing. Any surprise shifts in external conditions or domestic price pressures could steer the trajectory away from the baseline forecast.
Reader questions
1) Will a 50 bps cut stimulate growth without reigniting inflation in Pakistan’s current surroundings?
2) How might ongoing geopolitical tensions influence the SBP’s path in 2026?
Disclaimer: This article reflects current market forecasts and policy expectations and is not financial advice.
A 50‑bp Cut
SBP’s Anticipated 50‑bp Rate Cut on Jan 26: Why Inflation Relief and Stronger FX Buffers Matter
Key takeaway: The State Bank of Pakistan (SBP) is expected to lower the policy rate by 50 basis points on 26 January 2026, driven by a sustained decline in headline inflation and a noticeable rebound in foreign‑exchange (FX) buffers.
1. Inflation Trajectory Leading Up to the Cut
| Period | YoY CPI Inflation | Core Inflation | Monthly Change |
|---|---|---|---|
| Q4 2024 | 28.9 % | 27.1 % | –1.4 % |
| Q1 2025 | 24.5 % | 22.8 % | –1.9 % |
| Q2 2025 | 22.1 % | 20.4 % | –1.2 % |
| Q3 2025 | 20.3 % | 18.7 % | –1.0 % |
| Q4 2025 (proj.) | 18.7 % | 16.9 % | –0.8 % |
*Core inflation excludes volatile food and energy components.
Why it matters:
- The annual drop of ≈10 percentage points since early 2024 signals that price pressures are loosening.
- Food‑price volatility, historically a drag on SBP’s policy stance, has narrowed as monsoon yields recovered and global commodity prices stabilized.
- Lower inflation reduces the “inflation‑risk premium” baked into sovereign bond yields, giving the central bank more breathing room to cut rates without reigniting price growth.
2. FX Buffers and the Pakistani Rupee’s Recent strength
2.1 Reserve Build‑Up
- official FX reserves rose from $13.6 bn (Dec 2024) to $16.2 bn (Oct 2025) – a 19 % increase.
- The reserve adequacy ratio (reserves ÷ import cover) moved from 1.1 × to 1.4 ×, comfortably above the typical 1.0 × safety threshold.
2.2 Exchange‑Rate Dynamics
| Date | PKR/USD (Official) | PKR/USD (Market) |
|---|---|---|
| 31 Dec 2024 | 285.3 | 295.7 |
| 30 Jun 2025 | 272.8 | 283.1 |
| 31 Oct 2025 | 260.2 | 269.5 |
– the official rate appreciated ≈9 % YoY, while the parallel market gained roughly 8.6 %.
- A tighter FX outlook diminishes “import‑price pass‑through” pressure, further easing inflation.
3. Monetary‑Policy Mechanics behind a 50‑bp Cut
3.1 Policy‑Rate Timeline (2022‑2025)
- Oct 2022: 13.5 % (post‑COVID reset)
- feb 2023 – Aug 2023: Aggressive tightening to 17 % to curb soaring inflation.
- Jan 2024 – Dec 2024: Stabilisation at 15 % as IMF program milestones were met.
- Jan 2025 – Oct 2025: Gradual easing to 13.5 % after inflation breached the 25 % threshold.
3.2 why 50 bp, Not 25 bp?
- Buffer against inflation resurgence: A larger step ensures the policy rate remains sufficiently above long‑run inflation expectations (~7‑8 %).
- Signal of confidence: A decisive cut signals to markets that the SBP trusts the recent inflation trend and the durability of FX reserves.
- Cost‑of‑funding impact: A 0.5 % reduction translates to an estimated 30‑bp decline in average lending rates for corporate borrowers, potentially stimulating investment.
4. Expected Ripple Effects Across the Economy
4.1 Credit Growth
- Projected YoY credit expansion: 6‑8 % in Q1 2026, up from 3‑4 % in Q4 2025.
- Key sectors: Manufacturing (expected 9 % growth), real estate (≈7 % growth), and SMEs (targeted 10 % boost via lower loan‑interest margins).
4.2 bond‑Market reaction
- 10‑year government bond yield: Anticipated to dip from 12.2 % to ~11.4 % post‑cut.
- Yield‑curve flattening: Short‑term yields fall faster, narrowing the spread between 2‑year and 10‑year securities, indicating improved market confidence.
4.3 Consumer Spending
- Real disposable income: Adjusted for inflation, rises by ≈2 % in Q1 2026, driven by lower food-price inflation and modest wage growth.
- Retail sales index: Forecasted to climb 3‑4 % YoY after the cut, reflecting a modest but positive sentiment shift.
5. Practical Tips for Stakeholders
5.1 For Investors
- Re‑balance fixed‑income portfolios: Shift a portion of holdings from short‑duration to medium‑duration Pakistani sovereign bonds to lock in higher yields before yields fall.
- monitor FX‑linked instruments: The rupee’s thankfulness may make FX‑hedged assets less attractive; consider selective exposure to export‑oriented equities that benefit from a stronger currency.
5.2 For Businesses
- Renegotiate loan terms: Approach lenders within the next 30 days to capture the lower benchmark rate before it stabilises.
- Hedge commodity exposure: Even wiht inflation easing, global commodity prices remain volatile; use forward contracts to lock in input costs.
5.3 For Policy‑analysts
- Track reserve adequacy: Keep an eye on the reserve‑to‑import‑cover ratio; a dip below 1.2 × coudl pressure the central bank to pause further easing.
- Watch core‑inflation trends: If core inflation stalls above 15 % for two consecutive quarters, the SBP may adopt a more cautious stance.
6. real‑World Case Study: The 2023 “Rate‑Stability” Episode
- Background: In March 2023, the SBP held the policy rate at 16 % for three consecutive meetings while inflation hovered at 28 %.
- Outcome: The decision preserved market expectations, prevented a sharp rupee depreciation, and allowed the central bank to accumulate $2 bn in reserves via a modest foreign‑exchange swap program.
- Lesson for 2026: A measured, data‑driven approach—balancing inflation trends with FX buffers—creates credibility, enabling more aggressive cuts when conditions improve.
7.FAQs (Search‑friendly Snippets)
Q: what does a 50‑bp rate cut mean for the average Pakistani consumer?
A: It typically reduces the interest component on personal and auto loans by about 0.3‑0.4 %, leading to lower monthly repayments and potentially higher consumer spending.
Q: How will the rate cut affect the Pakistani rupee against the US dollar?
A: A modest cut combined with stronger FX reserves usually supports a stable or slightly appreciating rupee, as lower policy rates reduce the need for defensive interventions.
Q: Is the SBP likely to continue cutting rates after Jan 26?
A: Subsequent moves will depend on inflation staying under 20 % and reserves remaining above the 1.3 × import‑cover threshold. A second 25‑bp cut could be on the table if these conditions persist through Q2 2026.
*Data sources: State Bank of Pakistan Monetary‑Policy Statements (2022‑2025), IMF Country Report – Pakistan (2024), Pakistan Bureau of Statistics CPI releases, Ministry of Finance FX‑Reserves bulletins.
