State Bank raises policy rate by 50 bps to 12%
The State Bank of Pakistan raised its policy rate from 11.5% to 12% on Monday. The central bank cited the Middle East conflict, energy prices and wheat supply disruptions.
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- Policy rate raised by 50 basis points to 12%, effective October 27, 2026
- Nine of 10 MPC members backed the increase
- September consumer inflation was 10.3% year-on-year, against a 5% to 7% target range
The State Bank of Pakistan (SBP) raised its policy rate by 50 basis points to 12% on Monday, up from 11.5%. The central bank said the escalating Middle East conflict, elevated energy prices and domestic wheat supply disruptions had worsened the inflation outlook.
The Monetary Policy Committee (MPC) approved the increase by a majority of nine out of 10 members. The new rate takes effect from October 27, 2026. The MPC said the step was needed to anchor inflation expectations, stop a supply-side shock from feeding into broader prices and bring inflation back within the 5% to 7% target range.
Consumer inflation rose to 10.3% year-on-year in September, higher than the MPC had expected, with energy and wheat prices contributing significantly. Core inflation stayed elevated at around 8.4%. The SBP warned that sustained food and energy price increases could raise inflation expectations and eventually feed into core inflation. It also listed global commodity price volatility, unexpected changes in energy tariffs, further rises in wheat and related products, and adverse weather as risks.
Despite price pressures, the committee said economic activity has been recovering gradually since the fourth quarter of fiscal year 2026. Large-scale manufacturing grew 1.9% year-on-year in July-August FY27, compared with 0.4% in the fourth quarter of FY26. Cement and petroleum sales, private-sector credit and the Purchasing Managers Index also pointed to improving activity. The MPC kept its FY27 real GDP growth projection at 3.5% to 4.5%, but cautioned that further escalation in the Middle East and adverse climate events amid worsening El Nino conditions could undermine the recovery.
On the external side, Pakistan recorded a current account deficit of $874 million in the first quarter of FY27 as imports rose. Exports, led by rice, high-value-added textiles and services, showed signs of recovery, and workers' remittances remained resilient. The MPC expects the full-year deficit to stay within its projected range of zero to 1% of GDP. SBP reserves were stable at around $21.5 billion, about three months of import cover.
The committee noted that Pakistan had reached a staff-level agreement with the International Monetary Fund. The FBR collected 7% more taxes year-on-year in the first quarter of FY27, exceeding its target by Rs33 billion, and the overall fiscal and primary balances stayed in surplus. The MPC warned that higher global energy prices and the intensifying conflict had made fiscal management more challenging.
Broad money (M2) growth rose to 12.7% year-on-year as of October 9, from 11.4% on August 28. Private-sector credit grew 14.1% year-on-year, spread across working capital, fixed investment and consumer financing, with textiles, trade and agriculture among the main borrowers. The MPC expects credit growth to continue alongside the economic recovery.
Why it matters
A higher policy rate affects borrowing costs for loans and businesses across Pakistan. Private-sector credit was growing at 14.1% year-on-year, according to the MPC.
