SBP Cuts Policy Rate to 10.5% as KIBOR Declines, Easing Borrowing Costs

Islamabad: The Monetary Policy Committee of the State Bank of Pakistan on Monday reduced the policy rate by 50 basis points to 10.5 percent, effective December 16, 2025, in a move that came against market expectations of a pause.

The decision brings total monetary easing to 1,150 basis points since interest rates peaked at 22 percent. The policy rate had remained unchanged for four consecutive meetings, with the previous cut of 100 basis points announced in May 2025.

In its statement, the MPC said inflation remained within the target range of 5 to 7 percent during July to November FY26, although core inflation continues to show relative rigidity. The committee said the inflation outlook remains broadly stable, supported by moderate global commodity prices and anchored inflation expectations.

The MPC also noted improving economic activity, citing strong performance in key indicators, including higher-than-expected growth in large-scale manufacturing during the first quarter of FY26. At the same time, it flagged risks from the global environment, particularly for exports.

The policy rate cut, alongside the recent decline in the Karachi Interbank Offered Rate (KIBOR), is easing borrowing costs across the economy. Lower benchmark lending rates reduce financing costs for sectors that depend heavily on bank credit, including housing and construction.

For the real estate sector, lower KIBOR directly affects the cost of developer financing and mortgage-linked borrowing. Reduced debt servicing pressure can improve project feasibility, support new construction activity and make property purchases more affordable for buyers relying on bank financing.

The MPC also highlighted key developments since its last meeting, including higher unemployment levels, continued growth in the State Bank’s foreign exchange reserves to above $15.8 billion following IMF inflows, improved consumer confidence and fiscal surpluses recorded in the first quarter of FY26.

Despite global uncertainties, the central bank said the real policy rate remains sufficiently positive to stabilise inflation within the target range over the medium term while supporting sustainable economic growth.