SBP hikes policy rate to 12% on inflation, energy price concerns

The State Bank of Pakistan (SBP) Monetary Policy Committee (MPC) on Monday raised the policy rate by 50 basis points (bps) to 12%, in line with market expectations.

The decision was taken at the MPC’s third meeting of fiscal year 2026-27. The latest decision marked the SBP’s first rate hike since June 2026 amid inflationary pressures and rising global commodity prices.

“The inflation outlook deteriorated significantly because of the ongoing geopolitical crisis, including the US-Iran conflict, and other developments in the Middle East,” said Governor of the SBP, Jameel Ahmad.

The central bank chief cited rising energy prices, as oil prices have stayed above $100 per barrel, as key factors that led to the policy rate hike.

“Similarly, developments in the domestic market, especially an increase in wheat prices in the last 2-3 months and its impact on inflation,” contributed to the increase, he added.

SBP Governor said that nine members out of 10 voted in favour of the policy rate hike. “While one member held a different view and favoured a larger increase,” he said.

Remittances outlook improved

Jameel said that there is an expectation of further improvement in remittances going forward, as the first quarter saw remittances of $10.9 billion, which is nearly $11 billion.

“Due to this strong performance, the SBP has revised its annual outlook for remittances upward from $44 billion to $45 billion,” he said.

In its statement, the MPC noted that the intensification in the Middle East conflict, and low prospects of its near-term resolution, are keeping global energy prices at persistently elevated levels.

“While the impact of this global shock on the domestic economy has remained contained so far amidst proactive monetary policy adjustment and continued fiscal discipline, geopolitical developments have worsened the inflation outlook as compared to the earlier assessment.

“Although the external account and growth outlook remained broadly unchanged, risks have also increased.

“Considering these developments and the evolving risks, the MPC deemed today’s decision as necessary to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock, and bring inflation within the target range of 5 – 7%.

“This will help preserve macroeconomic stability, which is necessary for sustainable economic growth,” it said.

Key developments since last MPC

The MPC noted the following key developments since its last meeting.

“First, supported by continued FX purchases, SBP’s reserves remained stable at around $21.5 billion – reaching the level of 3 months of import cover.

“Second, a staff-level agreement was reached with the IMF.

“Third, in the latest sentiment surveys, inflation expectations of consumers increased, whereas those of businesses declined; meanwhile, confidence indicators for both weakened.

“Fourth, PBS reported revised real GDP growth for FY26 at 3.7%, almost unchanged from the initial estimate.

“Fifth, FBR exceeded its revenue collection target during Q1-FY27. Lastly, major central banks have increased interest rates in the wake of rising inflationary pressures, whereas the IMF has also revised its global inflation projections upward,” it said.

The MPC emphasised the importance of increasing external and fiscal buffers to further strengthen the economy’s resilience. The MPC also reiterated that continuing the prudent monetary and fiscal policy mix, alongside timely implementation of structural reforms, is essential for achieving higher and sustainable economic growth.

GDP growth to remain in range

In its statement, the MPC said that it expects real GDP growth to remain within the earlier projected range of 3.5-4.5% during FY27.

“This outlook is susceptible to heightened risks stemming mainly from further intensification in the Middle East conflict, as well as from adverse climate events amidst worsening El Niño conditions,” it warned.

The MPC expects that current account deficit in FY27 to remain within the earlier projected range of 0 – 1% of GDP.

“This, along with higher financial inflows, is expected to increase SBP’s FX reserves beyond the current level. This outlook, however, remains susceptible to multiple risks, including elevated global commodity prices, tightening international financial conditions, and supply constraints.”

Inflation outlook

The MPC noted that the re-escalation in the Middle East conflict and domestic wheat supply frictions are two major factors keeping inflation at elevated levels, and their expected continuation over the next few months has worsened the inflation outlook.

It said that elevated prices of energy and wheat and their allied products contributed significantly to the headline inflation of 10.3% y/y in September, which turned out higher than the MPC’s expectation.

“However, there is a risk that elevated food and energy inflation may further increase inflation expectations, which may seep into core inflation going forward,” it said.

It said that MPC’s today’s decision as important to keep the real policy rate adequately positive on forward-looking basis.

“This is necessary to bring inflation within the target range over the medium term.

“The inflation outlook is subject to multiple risks, including geopolitical tensions, global commodity price volatility, unanticipated adjustments in energy tariffs, further uptick in wheat and allied product prices, and adverse weather conditions.”

Previous MPC

At its previous meeting on September 14, the central bank’s MPC decided to keep the policy rate unchanged at 11.5%.

“The Committee noted that the recent intensification of the prolonged Middle East conflict has led to further increases in already elevated global commodity prices, while supply chain disruptions have persisted,” read the MPC statement.

“However, recent domestic macroeconomic data turned out broadly in line with the MPC’s expectations. Headline inflation increased to 11.1% y/y in August from 9.2% in July, while core inflation was slightly lower than expectations.”

A number of analysts had expected the SBP to hike interest rates.

“Given continuing uncertainty over the global geopolitical situation and its impact on the global energy supply chain, we expect SBP to raise the policy rate by 50bps to help mitigate any prolonged inflationary and external shock,” said Topline Securities.

Similarly, in a poll conducted by Topline Securities of market participants, 61% of respondents expected the policy rate to rise. Of these, 54% believed a 50bps rise, whereas 7% believed a 100bps increase.

Meanwhile, a sizable 39% expected the policy rate to remain unchanged.

Similarly, Foundation Securities also expected a 50bps hike by the central bank.

“We expect the MPC to raise the policy rate by 50bps to 12.0% at its meeting on Monday, 26 Oct’26.

“In our view, though, persistent above-target inflation driven by oil price volatility amid war in the Middle East, rising inflation expectations, a thin real interest rate and a pickup in growth argue for a measured, pre-emptive hike.

“A 50bps hike would lift the ex-post real interest rate to ~2.5% on our Oct’26 inflation estimate, from ~1.2% in Sep’26,” it said.

On the other hand, the Pakistan Institute of Development Economics (PIDE) urged the SBP to maintain status quo.

“While the balance of risks has shifted toward tightening, current macroeconomic conditions do not yet establish a compelling case for an immediate rate increase,” PIDE said.

It noted that Pakistan’s inflation outlook remains challenging but mixed.

“Headline inflation moderated to 10.26% in September, while non-food non-energy inflation also eased. However, elevated trimmed-mean inflation, weekly price pressures, and rising household inflation concerns warrant continued vigilance. Importantly, available evidence does not yet demonstrate generalised demand overheating or sufficiently broad-based second-round inflation pressures,” it said.

“PIDE’s assessment therefore favours a conditional hold rather than pre-emptive tightening,” it said.