KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday raised its key policy rate by 50 basis points (bps) to 12 percent, in line with market expectations, as worsening geopolitical developments clouded the inflation outlook and heightened risks to the external account and economic growth. Addressing a press conference after the meeting, SBP Governor Jameel Ahmed announced the MPC’s decision, saying that nine of the committee’s 10 members voted in favour of the rate hike.
The latest increase brings the cumulative increase in the SBP’s policy rate to 150 basis points this year from 10.5 percent to 12 percent, following a 100 bps hike in April 2026, as the Middle East conflict drove up energy prices and intensified inflationary pressures on the economy.
READ ALSO: Maintaining the policy rate
The MPC also expects real GDP growth to remain within the earlier projected range of 3.5 to 4.5 percent during FY27. However, it warned that this outlook is susceptible to heightened risks stemming mainly from further intensification in the Middle East conflict, as well as from adverse climate events amidst worsening El Niño conditions.
During the meeting the Committee noted that the intensification in the Middle East conflict, and low prospects of its near-term resolution, are keeping global energy prices at persistently elevated levels.
While the impact of the global shock on the domestic economy has remained contained so far, supported by proactive monetary policy adjustments and continued fiscal discipline, geopolitical developments have worsened the inflation outlook. The outlook for the external account and economic growth remains broadly unchanged, although associated risks have increased.
Considering developments on the external front and the evolving risks, the MPC deemed the rate hike necessary to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock, and bring inflation within the target range of 5-7 percent.
The committee believed that this move will help preserve macroeconomic stability, which is necessary for sustainable economic growth.
On economic developments, the Committee noted that SBP’s foreign exchange reserves remained stable at around USD 21.5 billion, covering three months of imports, supported by continued FX purchases. A staff-level agreement was reached with the IMF, while consumer inflation expectations rose and business expectations declined, with confidence weakening in both sectors. PBS revised FY26 GDP growth to 3.7 percent, nearly unchanged from its initial estimate, while the FBR exceeded its Q1-FY27 revenue target. Globally, major central banks raised interest rates amid rising inflationary pressures, prompting the IMF to revise its global inflation projections upward.
While noting these economic developments and the increasing frequency of global supply shocks, the MPC emphasised the importance of increasing external and fiscal buffers to further strengthen the economy’s resilience.
The Committee also reiterated that continuing the prudent monetary and fiscal policy mix, alongside timely implementation of structural reforms, is essential for achieving higher and sustainable economic growth.
The committee also noted that the re-escalation in the Middle East conflict and domestic wheat supply frictions are two major factors keeping inflation at elevated levels, and their expected continuation over the next few months has worsened the inflation outlook.
Higher energy and wheat prices, along with those of related products, contributed significantly to headline inflation, which rose to 10.3 percent year-on-year in September, exceeding the MPC’s expectations. Meanwhile, core inflation has steadied at an elevated level of around 8.4 percent.
However, elevated food and energy inflation could further fuel inflation expectations and feed into core inflation in the coming months. In view of rising risks to the inflation outlook, the Committee assessed the rate hike decision as important to keep the real policy rate adequately positive on a forward-looking basis.
Committee believed that this is necessary to bring inflation within the target range over the medium term. The inflation outlook is subject to multiple risks, including geopolitical tensions, global commodity price volatility, unanticipated adjustments in energy tariffs, a further uptick in wheat and allied product prices, and adverse weather conditions, it said.
According to the monetary policy statement issued by SBP, economic activity has started to recover gradually compared to Q4-FY26 with 1.9 percent LSM output growth in July-August FY27 against 0.4 percent during Q4-FY26.
Similarly, other high-frequency indicators such as cement and POL sales, private sector credit, and the Purchasing Managers Index also point to recovery in economic activity. Moreover, satellite imagery of night-time lights and NO2 emissions also support this assessment.
Meanwhile, better-than-expected initial estimates for Kharif crops have improved the agriculture outlook, while high-frequency indicators, including ICT exports, import volumes and business confidence, point to a gradual improvement in the services sector, supported by positive developments in commodity-producing sectors.
During Q1-FY27, FBR tax collection grew 7.0 percent y/y, exceeding the target by Rs33 billion. With the transfer of substantial SBP profit and contained expenditures, the overall fiscal and primary balances are assessed to remain in surplus during Q1-FY27.
However, the intensification in the Middle East conflict has made fiscal management more challenging. In this context, the MPC emphasised that sustained and concerted efforts will be required to further strengthen fiscal discipline, enhance revenue mobilisation through broadening of the tax base, and accelerate the implementation of structural reforms.
Broad money (M2) growth rose to 12.7 percent year-on-year as of October 9 from 11.4 percent on August 28, driven by higher SBP foreign exchange reserves and faster growth in net foreign assets. Meanwhile, net domestic assets growth slowed amid fiscal consolidation and increased external financing, reducing government borrowing from banks and creating space for private sector credit, which grew by 14.1 percent.
Credit growth was broad-based across working capital, fixed investment and consumer finance, with textiles, wholesale and retail trade, and agriculture among the key borrowing sectors. Going forward, PSC is likely to continue its momentum, alongside the projected pickup in economic activity.
Reuters adds: Central bank raised its key interest rate by 50 basis points to 12 percent on Monday, its first increase since April as inflation, fuelled by high energy costs due to the Gulf conflict, remained above target.
The move marks the State Bank of Pakistan’s second increase this year, following a 100-basis-points hike in April as the Middle East conflict pushed energy costs higher and threatened to spread price pressures across the economy.
It also ended the bank’s pause on the key rate after three straight holds since June.
“The Monetary Policy Committee (MPC) … noted that the intensification in the Middle East conflict, and low prospects of its near-term resolution, are keeping global energy prices at persistently elevated levels,” the panel said in a statement.
It said geopolitical developments had worsened the inflation outlook and risks had increased although the external account and growth outlook remained broadly unchanged.
“Considering these developments and the evolving risks, the MPC deemed today’s decision as necessary to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock, and bring inflation within the target range of 5–7 percent,” it said.
“This will help preserve macroeconomic stability, which is necessary for sustainable economic growth.”
SBP Governor Jameel Ahmad said it would take longer than planned for inflation to get within the target range and revised GDP growth to 3.7 percent for the current fiscal year ending June 30, 2027.
Annual inflation eased to 10.3 percent in September from 11.1 percent in August, but still above the central bank’s medium-term target range of 5-7 percent.
Higher borrowing costs constrain Pakistan’s economic recovery as it faces the impact of elevated energy prices on its import bill and domestic costs.
The IMF urged Pakistan this month to maintain sufficiently tight monetary policy to return inflation durably to target.
Pakistan reached a staff-level agreement with the IMF on October 7 that could unlock about $1.21 billion under its economic reform and climate resilience programmes, subject to executive board approval.
Copyright Business Recorder, 2026