The State Bank of Pakistan (SBP) has increased its policy rate by 50 basis points to 12 percent, citing rising inflation risks caused by escalating conflict in the Middle East, persistently high global energy prices and domestic wheat supply disruptions.
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In its monetary policy statement issued on October 26, 2026, the SBP said nine out of 10 members of the Monetary Policy Committee (MPC) voted in favour of the increase. The revised interest rate will take effect on October 27.
The central bank said the decision was necessary to keep inflation expectations under control, limit the wider impact of rising supply costs and bring inflation within its target range of 5% to 7%.
Although Pakistan’s economic growth and external account outlook remained broadly unchanged, the MPC warned that geopolitical developments had increased the risks facing the economy.
Middle East Conflict Pushes Inflation Risks Higher
The MPC said the intensification of the Middle East conflict and limited prospects for an early resolution were keeping global energy prices persistently elevated.
Pakistan’s headline inflation reached 10.3% year-on-year in September, exceeding the central bank’s expectations. Higher energy and wheat prices, along with the cost of related wheat products, contributed significantly to the increase.
Core inflation also remained elevated at around 8.4%.
The central bank warned that continued increases in food and energy prices could push inflation expectations higher and eventually feed into core inflation.
Other risks include volatility in international commodity prices, unexpected adjustments in energy tariffs, further increases in wheat prices and adverse weather conditions.
The MPC said maintaining a sufficiently positive real policy rate, based on the forward inflation outlook, was important to bring inflation within the 5% to 7% target range over the medium term.
Pakistan’s Economic Growth Forecast Remains Unchanged
Despite inflationary pressures, the SBP expects Pakistan’s economy to continue recovering during fiscal year 2026-27.
The MPC retained its real gross domestic product (GDP) growth forecast of 3.5% to 4.5% for FY27.
Large-scale manufacturing output grew by 1.9% year-on-year during July and August FY27, compared with marginal growth of 0.4% in the fourth quarter of FY26.
Other indicators, including cement and petroleum, oil and lubricants (POL) sales, private-sector credit and the Purchasing Managers Index, also pointed towards improving economic activity.
The central bank said initial official estimates for Kharif crops were better than anticipated, improving the outlook for agriculture.
Indicators related to information and communication technology exports, import volumes and services-sector business confidence also suggested gradually improving prospects.
However, the growth outlook remains vulnerable to further escalation of the Middle East conflict and adverse climate events amid worsening El Niño conditions.
Current Account Deficit Reaches $874 Million
Pakistan recorded a current account deficit of $874 million during the first quarter of FY27.
According to the SBP, exports are recovering, supported by rice, high-value-added textile products and services exports. Workers’ remittances have also remained resilient and are projected to exceed earlier expectations.
At the same time, imports have increased sharply, particularly non-energy imports, reflecting the economic recovery and higher prices.
The MPC expects the current account deficit to remain within its earlier projected range of 0% to 1% of GDP during FY27.
The central bank said the expected current account performance, together with higher financial inflows, could help increase its foreign exchange reserves beyond their current level.
However, elevated global commodity prices, tighter international financial conditions and supply constraints continue to pose risks.
Foreign Exchange Reserves Stand at $21.5 Billion
The SBP said its foreign exchange reserves remained stable at around $21.5 billion, supported by continued foreign exchange purchases. The reserves were equivalent to approximately three months of import cover.
The MPC also noted that Pakistan had reached a staff-level agreement with the International Monetary Fund (IMF).
The central bank emphasised the need to strengthen external and fiscal buffers to improve the economy’s ability to withstand repeated global supply shocks.
It said a prudent combination of monetary and fiscal policies, alongside timely structural reforms, would be important for maintaining economic stability and supporting sustainable growth.
FBR Exceeds First-Quarter Tax Collection Target
The Federal Board of Revenue (FBR) recorded 7% year-on-year growth in tax collection during the first quarter of FY27, exceeding its target by Rs33 billion.
The MPC assessed that Pakistan’s overall fiscal and primary balances remained in surplus during the quarter, supported by a substantial transfer of SBP profits and contained government expenditure.
However, the central bank warned that the escalation of the Middle East conflict had made fiscal management more challenging.
It called for continued fiscal discipline, a broader tax base, stronger revenue mobilisation and faster implementation of structural reforms.
The committee said prudent fiscal management remained essential for preserving macroeconomic stability.
Private-Sector Credit Growth Reaches 14.1%
Broad money, or M2, growth increased to 12.7% year-on-year as of October 9, compared with 11.4% on August 28.
The SBP attributed the increase to growth in net foreign assets, supported by higher foreign exchange reserves.
Meanwhile, growth in net domestic assets slowed amid continued fiscal consolidation and increased external financing. This reduced the government’s net borrowing from the banking system and created additional room for banks to lend to private businesses.
Private-sector credit grew by 14.1% year-on-year, with lending spread across working capital, fixed investment and consumer financing.
Major borrowing sectors included textiles, wholesale and retail trade, and agriculture.
The MPC expects private-sector credit to maintain its momentum as economic activity improves.
Why the Interest Rate Increase Matters
The policy rate increase reflects the SBP’s assessment that inflation risks have intensified even as Pakistan’s economy shows signs of recovery.
Higher interest rates generally increase borrowing costs for businesses and consumers, potentially affecting loans, investment and spending. They can also help moderate demand and inflationary pressures.
For Pakistan, the challenge is to control rising prices while sustaining economic growth, improving exports and maintaining external stability.
The SBP said stronger fiscal discipline, increased external buffers and timely structural reforms would be necessary to protect macroeconomic stability and support sustainable economic growth.
