SBP hikes policy rate by 100 bps to 11.5%

The State Bank of Pakistan (SBP) decided on Monday to increase the policy rate by 100 basis points (bps) to 11.50% in its third Monetary Policy Committee (MPC) meeting of 2026.

This is the central bank’s first hike in almost three years.

The decision was in line with market expectations, which anticipated the central bank to raise the rates in the wake of escalating geopolitical tensions in the Middle East, which have swelled energy prices, raising fears of a new wave of inflation.

The MPC, in its statement, noted that prolonging of the Middle East conflict has intensified risks to the macroeconomic outlook. In particular, the global energy prices, freight charges and insurance premiums continue to remain significantly above pre-conflict levels.

Furthermore, the supply chain disruptions have contributed to the prevailing 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. In this backdrop, the committee assessed that inflation is likely to increase and remain above the target range in the next few quarters.

“Accordingly, the MPC deemed it necessary to maintain a tighter policy stance to keep inflation expectations anchored and contain second- round effects of the current supply shock to bring inflation within the target range.

“This will be important to preserve macroeconomic stability, which is necessary for achieving sustainable economic growth,” read the statement.

Apart from the geopolitical events in ME, the MPC noted the following key developments since its last meeting.

“First, inflation rose to 7.3% in March, while core inflation inched up to 7.8%.

“Second, inflation expectations and confidence of consumers and businesses deteriorated in the latest surveys.

“Third, real GDP grew by 3.8% in H1-FY26 as compared to 1.9% 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 $15.8 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,” it added.

The MPC viewed today’s decision as important to achieve the objective of price stability over the medium term.

The committee also 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 emphasised the importance of undertaking structural reforms to make the external account more resilient to the evolving global landscape and to ensure sustainable economic growth,” read the MPS.

Real Sector

The MPC noted that high-frequency industrial and services sector indicators showed some signs of moderation in March.

“In agriculture, growth prospects have moderated slightly, driven mainly by lower than anticipated wheat production as per the first estimates reported by the Federal Committee on Agriculture.

“This, along with the expected spillover of the ongoing Middle East conflict on industrial and services sector activity in Q4, is expected to result in real GDP growth for FY26 turning out closer to the lower bound of the earlier projected range,” read the statement.

The MPC was of the view that the moderation in economic activity is likely to continue in FY27, though the outlook is subject to multiple risks, including the duration and intensity of the ongoing conflict.

External Sector

The MPC expects the current account in FY26 to remain closer to the lower bound of the earlier projected range, despite a challenging external environment, including a significant worsening of terms of trade.

The MPC assessed that the SBP’s FX reserves will reach above $18 billion by June 2026.

Fiscal Sector

The MPC shared that the financing side data indicate that the fiscal deficit remained contained till March.

“However, the ongoing Middle East conflict has made fiscal management more challenging.  The pass-through of higher international oil prices to domestic consumers necessitated support for vulnerable groups through targeted subsidies.

“To achieve the targeted full-year primary surplus, a larger cut in expenditures may be required,” it said.

Inflation outlook

Going forward, the MPC assessed that the current supply shock may push inflation to double digits in the coming months before it starts to ease subsequently.

“However, inflation is expected to stay above the upper bound of the target range of 5 – 7% for most of FY27.”

The MPC noted that this outlook is subject to multiple risks, particularly the duration and intensity of the ongoing conflict, the extent of pass-through of changes in global energy prices to the domestic economy, and potential fiscal slippages.

“This move signals tighter monetary conditions as the central bank intensifies its efforts to curb inflation,” said Behtari Capital.

At its previous meeting on March 9, 2026, the MPC, in line with market expectations, kept its benchmark policy rate unchanged at 10.5%.

Market experts showed mixed expectations regarding the central bank decision as the geopolitical situation remains tense.

Renowned analyst Ali Khizar, Director of Research at Business Recorder, had called for a 50 bps increase.

Khizar noted that if the MPC decides not to increase the policy rate, the market may expect a bigger change in June, and uncertainty may grow. To counter that, SBP needs a measured approach by giving the right signal through a token increase, he said.

Arif Habib Limited (AHL) anticipated that the SBP would keep the policy rate unchanged. “The world is negotiating peace amid uncertainty; therefore, at a time like this, we believe policy must continue to lean toward discipline over impulse.”

On the other hand, Topline Securities, another brokerage house, expected interest rates to increase by 50bps “to absorb the impact of rising oil prices, and its indirect/lagged impact on other commodities and to contain nonessential imports”.

Citing its survey, Topline said that 53% of its participants were expecting a rate increase.

The brokerage house attributed the change in participants’ views to elevated global crude oil prices and uncertainty over the longevity of the war.

Meanwhile, a Reuters poll found that the central bank would hold its key policy rate at 10.5%, though some analysts warn that rising oil prices from the Iran-US conflict could prompt the first rate hike in nearly two years.

Six of the 10 analysts surveyed by Reuters expected the SBP to keep the rate unchanged, while three forecast a 50bps increase and one a larger 100bps hike.