SBP raises policy rate by 50bps to 12% amid inflation risk

The State Bank of Pakistan (SBP) on Monday raised its key policy rate by 50 basis points to 12% amid rising inflation risks driven by higher energy and wheat prices and geopolitical tensions.

The decision was announced by SBP Governor Jameel Ahmad after a meeting of the central bank’s Monetary Policy Committee (MPC) in Karachi. The policy rate previously stood at 11.5%.

Ahmad said nine of the MPC’s 10 members voted in favour of the increase, marking the first rate hike since June.

He said economic conditions had deteriorated since the committee’s September meeting, while inflation expectations and projections for the current account deficit had also increased.

The governor attributed rising inflationary pressures partly to higher global energy prices amid geopolitical tensions, noting that petroleum product prices had remained above $100. Wheat prices had also increased, he added.

Inflation rises to 10.3%

According to the monetary policy statement, year-on-year headline inflation rose to 10.3% in September, exceeding the MPC’s expectations. Higher energy and wheat prices, along with increases in related food products, contributed to the rise.

Core inflation remained elevated at around 8.4%, the statement said.

The committee warned that sustained increases in food and energy prices could raise inflation expectations and eventually feed into core inflation.

It identified geopolitical tensions, global commodity price volatility, possible energy tariff adjustments, further increases in wheat prices and adverse weather conditions as key risks to the inflation outlook.

Economic growth projected at 3.5%-4.5%

The SBP expects Pakistan’s economy to grow between 3.5% and 4.5% during the current fiscal year.

Ahmad said exports remained below the desired level, although they had improved. The central bank projects exports of $32.5 billion and imports of $71 billion during FY2026-27.

Workers’ remittances are expected to reach $45 billion, according to the governor.

The monetary policy statement said Pakistan recorded a current account deficit of $874 million during the first quarter of FY2026-27.

Exports were recovering, supported by rice, high-value-added textiles and services, while remittances remained resilient and were projected to exceed earlier expectations.

Imports were also rising sharply, driven by non-energy purchases, recovering economic activity and higher prices.

The SBP expects the current account deficit to remain within its projected range of 0% to 1% of gross domestic product (GDP) for the current fiscal year. Higher financial inflows are expected to help increase foreign exchange reserves.

Reserves remain around $21.5 billion

The central bank said its foreign exchange reserves stood at around $21.5 billion, equivalent to approximately three months of import cover, supported by continued foreign exchange purchases.

The statement also noted that Pakistan had reached a staff-level agreement with the International Monetary Fund (IMF).

During the first quarter of FY2026-27, Federal Board of Revenue tax collection grew 7% year-on-year, exceeding its target by Rs33 billion.

The overall fiscal and primary balances were assessed to remain in surplus during the quarter.

However, the MPC warned that the intensifying conflict in the Middle East had made fiscal management more challenging. It emphasised the need for stronger fiscal discipline, a broader tax base and faster structural reforms.