The State Bank of Pakistan raised its policy rate by 50 basis points to 12% on Monday as rising energy prices intensified inflation risks. The increase from 11.5% marks the central bank’s first rate hike since June.
Governor Jameel Ahmad announced the decision after the Monetary Policy Committee meeting in Karachi. Nine of the committee’s 10 members supported the increase, he said.
“Geopolitical conditions have led to an increase in energy prices,” Ahmad said, adding that petroleum product prices had remained above $100.
He said economic conditions had deteriorated since the September meeting. Expectations for inflation and the current account deficit had increased somewhat, while wheat prices had also risen.
The committee reviewed those developments before deciding to tighten monetary policy. The move seeks to contain inflation expectations and bring inflation towards the central bank’s 5–7% target range.
Inflation exceeds expectations
Headline inflation reached 10.3% year-on-year in September, exceeding the MPC’s expectations, according to the monetary policy statement. Higher energy and wheat prices, alongside related food products, drove much of the increase.
Core inflation remained elevated at around 8.4%. The committee warned that sustained food and energy price increases could raise inflation expectations and eventually feed into core inflation.
It identified geopolitical tensions, volatile global commodity prices and possible energy tariff adjustments as major risks. Further wheat price increases and adverse weather could also worsen the inflation outlook.
The decision follows renewed pressure from international energy markets, alongside domestic food-price increases. Together, these developments have complicated the central bank’s efforts to contain price pressures while supporting economic activity.
Growth and external account outlook
Ahmad projected economic growth of 3.5–4.5% during FY2026-27. He said exports had improved but remained below the level the economy required.
The central bank expects annual exports of $32.5 billion and imports of $71 billion. Workers’ remittances could reach $45 billion.
Pakistan recorded a current account deficit of $874 million during the first quarter of FY2026-27. Rice, higher-value textiles and services led the export recovery.
Remittances remained resilient, with the central bank expecting inflows to exceed earlier projections. Imports also increased sharply, reflecting non-energy purchases, recovering economic activity and higher prices.
Despite those pressures, the SBP retained its current account deficit forecast of 0–1% of GDP for the fiscal year. It expects higher financial inflows to help build foreign exchange reserves.
Reserves stable, fiscal risks persist
The central bank’s reserves remained near $21.5 billion, covering approximately three months of imports. Continued foreign exchange purchases supported that position.
The statement also noted Pakistan’s staff-level agreement with the International Monetary Fund.
Federal Board of Revenue tax collection increased 7% year-on-year in the first quarter, exceeding its target by Rs33 billion. The SBP assessed both the overall fiscal balance and primary balance as remaining in surplus.
However, the MPC warned that the intensifying Middle East conflict had complicated fiscal management. It urged stronger fiscal discipline, a broader tax base and faster structural reforms.
