KARACHI: In line with market expectations, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has raised the policy rate by 100 basis points to 11.50 percent, to address risks to the macroeconomic outlook stemming from the prolonged conflict in the Middle East.
The MPC has raised benchmark interest rate for the first time in nearly three years, delivering a larger-than-expected hike as escalating tensions in the Middle East disrupt energy supplies and stoke inflationary pressures.
The last increase in the key policy rate was announced in June 2023, when the committee raised it by 100 basis points to an all-time high of 22 percent.
A year later, in June 2024, the MPC began easing, cutting the rate by 150 basis points to 20.5 percent, followed by a gradual reduction to 10.50 percent.
READ MORE: SBP holds policy rate at 10.5% amid Middle East tensions
During a meeting, held on Monday at the head office of SBP, the MPC weighed two options, either to proactively raise the policy rate amid heightened volatility or to wait for more data before reacting, and ultimately opted for the first option, increasing the rate by 100 basis points.
The Committee noted that the prolonged Middle East conflict has heightened risks to the macroeconomic outlook. It observed that global energy prices, freight charges, and insurance premiums remain well above pre-conflict levels, while ongoing supply chain disruptions continue to add to uncertainty.
While the incoming data has been broadly in line with the MPC’s expectations so far, the impact of these global developments will be visible in key economic indicators going forward.
Against this backdrop, the MPC Pakistan assessed that inflation is likely to rise and remain above the target range over the coming quarters.
Accordingly, the MPC deemed it necessary to maintain a tight policy stance to anchor inflation expectations and contain second-round effects of the ongoing supply shock, with a view to bringing inflation back within the target range. It noted that preserving macroeconomic stability will be critical for achieving sustainable economic growth.
In light of the economic developments and evolving risks, the MPC viewed policy rate hike decision as important to achieve the objective of price stability over the medium term.
The Committee reiterated the important role of the continued build-up of external buffers and fiscal discipline. These efforts have contributed to stronger initial economic conditions at the start of the ongoing geopolitical conflict as compared to similar shocks in the recent past.
The MPC also emphasized the importance of undertaking structural reforms to make the external account more resilient to evolving global landscape and to ensure sustainable economic growth.
Apart from the geopolitical events in the Middle East, the MPC noted the key developments since its last meeting. First, inflation rose to 7.3 percent in March, while core inflation inched up to 7.8 percent.
Second, inflation expectations and confidence of consumers and businesses deteriorated in the latest surveys. Third, real GDP grew by 3.8 percent in H1-FY26 as compared to 1.9 percent in the same period last year. Fourth, the current account posted a small surplus during July-March FY26.
Fifth, despite significant debt repayments, SBP’s FX reserves as on April 24, 2026 are around USD15.8 billion, supported by the issuance of Eurobonds, as Pakistan re-entered international capital markets after a gap of over four years. Lastly, the staff level agreement was reached with the IMF on March 27, 2026.
According to monetary policy statement issued after the meeting, amid weaker agricultural output and the expected spillover of the ongoing Middle East conflict on industrial and services activity in Q4, real GDP growth for FY26 is likely to settle near the lower bound of the earlier projected range at 3.75 percent.
The slowdown in economic activity is expected to persist into FY27, although the outlook remains contingent on several risks, particularly the duration and intensity of the conflict.
The consecutive surpluses in February and March led to a small cumulative current account surplus during July-March FY26 mainly supported by resilient workers’ remittances. Accordingly, the current account in FY26 is now likely to remain closer to the lower bound of the earlier projected range, despite challenging external environment including significant worsening of terms-of-trade.
The MPC has also emphasised the need for sustained fiscal reforms, including broadening the tax base and curtailing SOE losses, to strengthen fiscal sustainability and resilience.
FBR tax collection missed its March target, taking the July-March FY26 shortfall to Rs611 billion. Despite this, the fiscal deficit remained contained, though the ongoing Middle East conflict has complicated fiscal management. Higher global oil prices have required targeted subsidies for vulnerable groups, and achieving the full-year primary surplus may require deeper spending cuts.
The broad money growth decelerated to 14.5 percent as of April 10, from 16.0 percent on February 20. This moderation primarily reflects a deceleration in net budgetary borrowing from the banking system.
Meanwhile, credit to the private sector continued to grow around 13 percent, in line with improving economic activity and the lagged impact of earlier policy rate cuts. During July-March FY26, the private sector credit flows expanded across working capital, fixed investment and consumer finance.
Sectoral flows were concentrated in textiles, wholesale and retail trade, and chemicals, while the sustained rise in consumer financing points to recovery in household demand. On the liability side, both currency in circulation and deposits decelerated since the last MPC meeting.
Reuters adds: Central bank raised its key policy rate by 100 basis points to 11.5 percent on Monday, its first hike in almost three years, warning that inflation could surge to double digits in the coming months as the prolonged Middle East conflict drives up energy costs in the import-dependent nation.
The State Bank of Pakistan’s Monetary Policy Committee surprised most forecasters — six of 10 analysts in a Reuters poll had expected rates to remain on hold at 10.5%.
The central bank said inflation, which quickened to 7.3 percent in March, was likely to remain above its 5-7 percent target range for most of the next fiscal year, as fuel price increases seep into core inflation through higher transport costs.
A ceasefire in the Iran-US war has so far failed to produce a lasting peace deal, keeping oil prices elevated.
“Sense has prevailed,” said Fawad Basir, head of research at KTrade. “The precautionary and prudent stance adopted by the central bank was essential to combat short-run shocks.”
Basir added he did not see the move as a shift in trend or the start of a rate-hike cycle, calling it a precautionary measure “till things smoothen out on the geopolitical front.”
The central bank said real GDP grew 3.8 percent in the first half of fiscal year 2026, more than double the 1.9 percent recorded a year earlier, but warned full-year growth would come in “closer to the lower bound” of its forecast range, with moderation expected to continue into FY27.
Pakistan’s foreign exchange reserves stood at USD15.8 billion as of April 24 and were projected to rise above USD18 billion by end-June, the SBP said, after Eurobond issuance marked the country’s return to international capital markets for the first time in more than four years.
The SBP has cut rates by a cumulative 1,150 basis points since June 2024, from a record high of 22 percent.
Pakistan is on a USD7 billion IMF programme and reached a staff-level agreement with the fund in March, which had previously cautioned against premature easing and urged the bank to maintain a positive real interest rate.
Copyright Business Recorder, 2026
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