Stabilisation first, growth later

Tresmark: In early 2001, Turkey faced a full-blown economic crisis: overnight rates briefly spiked above 5,000%, the lira was forced to float and fell around 50% within days, and nearly 20 banks were shut or taken over, wiping out capital and careers in one stroke. Lesson learnt was credibility cannot be talked into existence. Pakistan’s setup today is different, but the sequence is familiar: stabilisation has improved, reserves are up, inflation has cooled, and the next phase depends on consolidating stability before chasing growth.

Monetary Policy and Inflation
The SBP’s 50 bps cut to 10.5% reflects increasing confidence that headline inflation is now broadly contained within the 5–7% target range, supported by benign global commodity prices and anchored expectations, even as core inflation remains sticky and risks are pushed toward the latter part of FY26 due to base effects and potential supply-side pressures. This was a calibrated move rather than a policy pivot. Macro stability will continue to take precedence over an aggressive growth push. The recent Fed cut likely may have played in to the minds of the committee.

Growth, as feeble as it comes, remains a domestically driven recovery, as weak global demand and shifting trade dynamics continue to cap export performance and limit the contribution of the external sector to growth.

External Sector and Reserves
FX reserves have strengthened meaningfully, rising above $21bn following IMF inflows and pushing SBP reserves beyond the December target, but recent improvements in the current account remain driven largely by import compression rather than export growth, with November’s modest surplus accompanied by declines in both exports and imports. Remittance inflows remain the primary external stabiliser. Exports are the weak link. An upcoming $250mn equivalent Panda bond issuance in January should pave way for larger and consistent issuances.

The appreciation in the REER to 104.8, above its long-term average of 103.2, points to a gradual erosion of export competitiveness in an import-dependent economy with a narrow export base

Will USDPKR go below 280/$
The momentum is certainly on Rupee’s side, but the pace is slowing. Given the discouraging export numbers and the soft global demand, we would be surprised if the Central Bank would allowed the Rupee to decisively break the 280 figure. Having said this, activity from exporters selling dollars has picked up and pressure is surely on the dollar

RBI seen intervening to stabilise INR
Aggressive intervention by the Reserve Bank of India drove the rupee sharply stronger, lifting it past the 90/$ level to close at 89.57 and marking its best one-day gain in three years. Traders reported heavy dollar selling via a large state-run bank, widely seen as RBI-directed, in what appeared to be a deliberate attempt to flush out speculative positioning and reassert control, underscoring that while global FX volatility is rising again, some central banks remain willing to defend their lines decisively.

Dollar finds a bid with Venezuela card
The US dollar finally caught a safe-haven bid after Donald Trump’s Venezuela blockade reintroduced geopolitical risk, reversing part of the recent dollar weakness that had taken the DXY down to 98.25 amid a sharp rise in US unemployment to 4.6% and a growth scare triggered by Brent crude slipping below $58. The shift in risk sentiment lifted the greenback, pushing the yen weaker from the mid-154s to close near 157, though near-term moves continue to reflect dollar strength and risk flows rather than a settled view on Japan itself.

The Bank of Japan raised benchmark interest rates by 25 basis points to 0.75%, their highest level since 1995. However, the yen’s medium-term direction will hinge less on global risk sentiment as the BoJ edges closer to a genuine inflection point. Inflation dynamics are no longer purely imported, core CPI has stayed above target longer than expected, and wage negotiations ahead of the spring shunto are gaining traction, shifting the internal debate from whether to normalise to how and when. While Ueda (the Governor) remains cautious, markets are increasingly focused on guidance, language, and sequencing rather than the immediate rate decision, reinforcing that Japan is quietly re-entering the global policy conversation at a time when US growth signals are wobbling and policy shocks are returning.