SBP Raises Policy Rate by 50 Basis Points to 12% Amid Rising Inflation Risks

ISLAMABAD: The State Bank of Pakistan (SBP) has increased its policy rate by 50 basis points, raising it from 11.5 percent to 12 percent amid growing inflationary pressures linked to escalating tensions in the Middle East. The new policy rate will take effect from October 27, 2026.

According to the Monetary Policy Statement issued on Monday, the Monetary Policy Committee (MPC) approved the increase by a majority vote of nine out of ten members.

The committee said the intensification of the Middle East conflict and limited prospects for its near-term resolution had kept global energy prices persistently high, worsening Pakistan’s inflation outlook.

The SBP said the decision was necessary to keep inflation expectations anchored, contain the second-round effects of the ongoing supply shock and bring inflation within the target range of 5 to 7 percent.

The central bank noted that inflation reached 10.3 percent year-on-year in September 2026, exceeding the MPC’s expectations, while core inflation remained elevated at around 8.4 percent. Higher energy and wheat prices, along with prices of related products, were identified as major contributors to inflationary pressures.

The committee warned that continued geopolitical tensions, volatility in global commodity prices, possible adjustments in energy tariffs, rising wheat prices and adverse weather conditions could further worsen the inflation outlook.

On economic growth, the SBP observed that economic activity had gradually started recovering during the first two months of FY2027. Large-scale manufacturing output grew by 1.9 percent year-on-year during July and August, compared with marginal growth of 0.4 percent in the fourth quarter of FY2026.

Other indicators, including cement and petroleum sales, private-sector credit and the Purchasing Managers’ Index, also pointed towards a gradual recovery.

The SBP maintained its economic growth projection for FY2027 at 3.5 to 4.5 percent, while warning that further escalation of the Middle East conflict and adverse climatic conditions could pose significant risks.

Regarding the external sector, Pakistan recorded a current account deficit of $874 million during the first quarter of FY2027. Exports of rice, high-value-added textiles and services showed improvement, while workers’ remittances remained resilient.

The central bank said its foreign exchange reserves had remained stable at around $21.5 billion, equivalent to approximately three months of import cover. It expects reserves to increase further, supported by higher financial inflows.

On the fiscal front, the Federal Board of Revenue (FBR) collected 7 percent more revenue year-on-year during the first quarter of FY2027, exceeding its target by Rs33 billion.

The MPC noted that the overall fiscal and primary balances were estimated to remain in surplus during the quarter, supported by substantial transfers of SBP profits and controlled government expenditures.

The central bank also reported that broad money supply growth increased to 12.7 percent as of October 9, compared with 11.4 percent on August 28. Meanwhile, credit to the private sector expanded by 14.1 percent year-on-year, reflecting increased financing across working capital, fixed investment and consumer finance.

The Monetary Policy Committee emphasized the need to strengthen external and fiscal buffers, broaden the tax base, maintain fiscal discipline and accelerate structural reforms.

It reiterated that a prudent combination of monetary and fiscal policies, alongside timely structural reforms, would be essential to maintaining macroeconomic stability and achieving sustainable economic growth.