Karachi: The State Bank of Pakistan (SBP) announced that it would maintain its policy rate at 10.50%, defying expectations of a rate cut. In a move aimed at enhancing liquidity, the central bank reduced the cash reserve requirements for banks, potentially boosting the banking sector's profitability and economic activity.
According to JS Global, the SBP's decision to keep the policy rate unchanged surprised many market participants who anticipated a reduction of 50 to 75 basis points. Simultaneously, the SBP decreased the daily and fortnightly cash reserves requirement for banks by 100 basis points, bringing the daily requirement to 3.0% and the fortnightly requirement to 5.0%. This adjustment is expected to inject approximately Rs300 billion into the banking sector, which could increase profitability by up to 2%.
The central bank also provided updates on macroeconomic forecasts, revising GDP growth estimates upward to 3.75-4.75% due to stronger-than-anticipated large-scale manufacturing output and a lesser impact of floods on agriculture. Additionally, foreign exchange reserves are projected to reach an all-time high of over $20.2 billion by December 2026, excluding potential contributions from Panda or Eurobond issuances.
The current account deficit is expected to remain in the lower half of the projected 0-1.0% of GDP range, supported by robust remittance flows forecasted to reach $42 billion by FY26. Despite unchanged inflation projections, the SBP expects the average inflation rate to align with a medium-term target of 5-7% in FY26.
The report also highlighted the external debt servicing situation, with $25.7 billion slated for repayment in FY26, of which $5.7 billion has already been repaid. The SBP noted improvements in the external debt mix, with bilateral and multilateral debt comprising 75% of the total.
Efforts are underway to address a decline in exports, particularly rice, with the government offering rebates to incentivize exports. The SBP also acknowledged potential indirect impacts on Pakistan from geopolitical tensions between Iran and the United States, particularly in relation to oil prices.
In a development not yet factored into forecasts, the SBP mentioned a debt-equity swap transaction with the UAE, describing it as a one-off agreement that is progressing well.
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