Karachi, October 26,2026: The State Bank of Pakistan (SBP) on Monday raised its key policy rate by 50 basis points to 12 per cent, marking its first increase since April, as persistent inflationary pressures driven by elevated global energy prices and the Gulf conflict worsened the inflation outlook.
In a statement, the SBP’s Monetary Policy Committee (MPC) said nine of its 10 members voted in favour of the increase, while one member held a different view.
The committee cited the intensification of the Middle East conflict and limited prospects for an early resolution as key factors keeping global energy prices elevated. It said geopolitical developments had worsened the inflation outlook, despite the domestic economy remaining relatively resilient so far.
The MPC said the rate increase was necessary to anchor inflation expectations, contain the second-round effects of the ongoing supply shock and bring inflation within the target range of 5 to 7 per cent over the medium term.
The committee noted that foreign exchange reserves had remained stable at around $21 billion, while Pakistan had reached a staff-level agreement with the International Monetary Fund (IMF). Real gross domestic product (GDP) growth was estimated at 3.7 per cent for the current fiscal year, ending June 30, 2027.
It also noted that the Federal Board of Revenue had exceeded its revenue collection target during the first quarter of the current fiscal year, while major central banks had raised interest rates amid growing inflationary pressures. The IMF had also revised its global inflation projections upwards.
Inflation outlook deteriorates
The MPC said inflation eased to 10.3 per cent in September from 11 per cent in August. However, renewed escalation in the Middle East conflict and domestic wheat supply disruptions continued to put pressure on prices.
The committee warned that the expected persistence of these factors over the coming months had worsened the inflation outlook. Elevated food and energy prices could further raise inflation expectations and eventually feed into core inflation.
It said the policy rate adjustment was intended to keep the real interest rate adequately positive on a forward-looking basis and help return inflation to the target range.
The MPC identified geopolitical tensions, volatility in global commodity prices, unexpected energy tariff adjustments, further increases in wheat and related product prices, and adverse weather conditions as key risks to the inflation outlook.
External account and growth projections
On the external front, the central bank said exports were recovering and remittances remained resilient, with inflows projected to exceed earlier estimates.
The current account deficit for fiscal year 2026-27 was projected to remain within the range of zero to one per cent of GDP. The SBP expected this, alongside higher financial inflows, to help increase foreign exchange reserves beyond their current level.
However, the outlook remained vulnerable to elevated global commodity prices, tighter international financial conditions and supply constraints.
The MPC projected GDP growth of 3.5 to 4.5 per cent for FY27, while warning that an escalation in the Middle East conflict and adverse climate events, including El Niño conditions, could pose risks to economic activity.
The committee also stressed the importance of strengthening external and fiscal buffers, maintaining prudent monetary and fiscal policies, and implementing structural reforms to improve economic resilience and support sustainable growth.
SBP governor explains decision
Addressing a press conference, SBP Governor Jameel Ahmad said the decision was based on several underlying factors, particularly the inflation outlook and the impact of the US-Israel war on Iran on global energy and oil prices.
He said the MPC had considered consumer expectations, forecasts from other analysts, global commodity prices, developments in the domestic market, remittance inflows and export trends.
Ahmad said the current account had deteriorated since the previous MPC meeting but remained within the projected range of zero to one per cent of GDP.
He also revised the central bank’s remittance projection upwards from $44 billion to $45 billion. Exports were showing improvement, he said, although their performance remained below the economy’s needs. Imports were estimated at close to $71 billion.
The governor said inflation would take longer than previously anticipated to return to the target range. The SBP revised its GDP growth estimate to 3.7 per cent for the fiscal year ending June 30, 2027.
Meanwhile, Topline Securities said the policy rate increase was in line with its expectations.
Policy rate reversal after easing cycle
Before Monday’s decision, the policy rate stood at 11.5 per cent. The SBP had kept it unchanged since raising it by 100 basis points in April in response to rising global energy prices and supply-chain risks.
The central bank had cumulatively reduced the policy rate by 1,050 basis points since mid-2024, following a record high of 22 per cent in June 2023, as inflation eased from multi-decade highs.
Last week, the IMF called on Pakistan to ensure that fiscal policy went beyond meeting primary balance targets and safeguarding debt sustainability. It urged the country to reinforce policy credibility, support economic recovery and create room for public investment and social spending to promote stronger long-term growth.
