Single-digit rates back in sight at upcoming MPC

The State Bank of Pakistan (SBP) is expected to reduce the policy rate in its upcoming Monetary Policy Committee (MPC) scheduled to be held on January 26, 2026, on account of easing inflation, external stability and falling bond yields.

“We believe the SBP is likely to deliver a 75bps [basis points] cut in the upcoming MPC (Jan 26th), potentially taking the policy rate to 9.75%, signalling a long-awaited return to single-digit territory,” said Arif Habib Limited (AHL) on Friday.

Giving its rationale behind the rate cut, AHL said that the move is clear as inflation has cooled significantly, the macroeconomic environment is increasingly supportive of an easing cycle, the currency remains broadly stable, the current account is manageable, international commodity prices, especially oil, have eased, and domestic demand, along with industrial growth, is picking up.

“Together, these factors create the space for the SBP to implement a cut without destabilising the economy,” it added.

AHL further emphasised that a 75bps cut in the upcoming MPC is well-aligned with macro realities.

“Inflation is supportive, growth needs nurturing, fiscal math demands relief, and external stability remains intact.

“And yet, beneath this consensus, there is a subtle undertone. If conditions continue to cooperate and confidence remains intact, the space for a slightly bolder move, like a 100bps cut, quietly exists,” it added.

Last month, the SBP, in a surprise move, decided to reduce the policy rate by 50bps to 10.5%. The reduction took the total easing since rates peaked at 22% to 1,150bps.

Similarly, Topline Securities, another brokerage house, also expected a rate cut, citing its recent survey, which showed that 80% of the participants were expecting a rate cut.

 “Out of 80% rate cut participants, 56.4% expect 50bps cut, 15.4% expect 100bps cut, 5% expect 25 bps cut, and 3% expect 75bps cut,” said Topline Securities.

The brokerage house attributed the shift in market perception to lower-than-expected inflation readings in the last two months, better than expected remittance flows, supporting external accounts, and largely stable PKR/USD parity.

“We also expect the central bank to reduce the interest rate by 50bps to 10.0%,” it said.

Topline shared that the real rates based on average inflation for FY26 are currently around 350bps, higher than the historical average of 200bps.

“Nonetheless, in our view, the central bank will continue to maintain above average real rates to ensure sustainable growth in the economy,” it added.