Karachi: In an unexpected move, the State Bank of Pakistan (SBP) announced that it would keep the policy rate steady at 10.5%, despite widespread expectations of a reduction between 50 to 100 basis points. The decision comes amid concerns over persistent core inflation, a significant trade deficit, and domestic economic growth that surpassed forecasts, diminishing the necessity for monetary policy easing.

According to JS Global, the SBP has also decided to reduce the Cash Reserve Requirement (CRR) to 5%. This adjustment is expected to enhance banks' ability to allocate funds into income-generating assets, thereby supporting the growth of private sector credit. By maintaining the policy rate, the Monetary Policy Committee (MPC) aims to prevent immediate repricing pressure on loan assets, which would help banks maintain asset yields and safeguard net interest margins.

The strategy to redirect non-earning cash into loans and investments is anticipated to be beneficial for banks' overall profitability, while also alleviating pressure on funding costs. This development is expected to foster a positive outlook on banking sector valuations, as noted by JS Global in its analysis.