SBP Holds Policy Rate at 10.5% in January 2026: Banks Gain, Cyclicals Wait

The State Bank of Pakistan kept its policy rate unchanged at 10.5 percent on 26 January 2026, the first monetary policy meeting of the year. Most of the market had expected a cut, so the decision to hold reads as a mild surprise for rate sensitive sectors and a quiet positive for banks.

What the State Bank's January decision changed

The Monetary Policy Committee, the group at the central bank that sets interest rates, left the policy rate at 10.5 percent. The policy rate is the benchmark the bank uses to steer borrowing costs across the economy, so it feeds straight into what banks earn on loans and what companies pay on debt. Going into the meeting, a survey by Arif Habib Limited showed most participants expecting a cut: about 43.5 percent looked for a 75 basis point reduction and 39.1 percent for 50 basis points, with only 17.4 percent expecting no change.

The committee held because it wanted to keep the real policy rate, the gap between the rate and inflation, comfortably positive. Headline inflation was 5.6 percent year on year in December 2025, in line with the bank's own expectation, but core inflation, which strips out food and energy, had steadied around a higher 7.4 percent. The committee judged that keeping rates where they are gives it a better chance of holding inflation inside its 5 to 7 percent medium term target.

Why the rate hold matters for bank stocks

Banks are the most direct beneficiaries of a higher for longer rate. When the policy rate stays elevated, banks keep earning wide net interest margins, the difference between what they charge on loans and government paper and what they pay depositors. The market had begun to price in cheaper money ahead, which would slowly squeeze those margins. By holding, the State Bank keeps the favourable margin environment in place for longer than expected, which supports bank earnings.

Which stocks, and why

For the large banks this is a supportive signal. Habib Bank, United Bank, MCB Bank, Meezan Bank, Bank Alfalah, Bank Al Habib and National Bank of Pakistan all earn a large share of income from the spread on lending and investments, so a sustained high rate keeps that engine running. This works through the policy rate rather than any company news, so it is an indirect effect on the sector.

The other side falls on rate sensitive, debt carrying sectors that were hoping for relief. Cement and cars are usually built or bought with borrowed money, so a delayed cut keeps financing costs high and a demand recovery on hold. Lucky Cement, D.G. Khan Cement, Indus Motor and Pak Suzuki are the kind of names that would have welcomed a cut. The effect here is mild, because nothing actually changed. It is the absence of relief rather than a fresh cost.

What to watch

The next inflation prints are the thing to track. If core inflation cools back toward target, the path to a cut opens up again at later meetings. If global oil and the rupee push inflation higher, the bank could stay on hold for longer, or turn to hikes. The tone of the next policy statement, and the size of the gap between the rate and inflation, will signal which way it leans.