The State Bank of Pakistan (SBP) on Monday increased its key policy rate by 50 basis points to 12%, effective October 27, 2026, citing a worsening inflation outlook driven by persistently high global energy prices and escalating geopolitical tensions in the Middle East.
In its latest Monetary Policy Statement, the SBP’s Monetary Policy Committee (MPC) said the intensifying Middle East conflict and the low likelihood of a near-term resolution kept global energy prices elevated, renewing inflationary pressures despite the economy’s resilient performance.
“The MPC deemed today’s decision 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 percent,” the central bank said.
Nine out of ten MPC members supported the decision. The committee noted that while Pakistan’s external account and growth outlook remained broadly unchanged, risks to the economy had increased, warranting a pre-emptive monetary policy response to preserve macroeconomic stability.
According to the SBP, headline inflation accelerated to 10.3 percent year-on-year in September, exceeding earlier expectations, mainly due to elevated energy and wheat-related prices. Meanwhile, core inflation remained steady at around 8.4 percent. The central bank warned that persistently high food and energy costs could further lift inflation expectations and feed into broader price pressures.
The MPC observed that economic activity was gradually recovering. Large-scale manufacturing (LSM) grew 1.9 percent year-on-year in July-August FY27, up from 0.4 percent in the previous quarter. Other indicators, including cement and petroleum sales, private-sector credit and Purchasing Managers’ Index readings, also pointed towards improving business activity.
The committee maintained its FY27 economic growth forecast within the previously projected range of 3.5 to 4.5 percent. However, it cautioned that the outlook remained vulnerable to a further escalation of Middle East tensions and adverse climate-related developments linked to worsening El Niño conditions.
On the external front, the current account recorded a US$874 million deficit in the first quarter of FY27. Nevertheless, the SBP said exports were recovering, led by rice, higher value-added textile products and services exports, while workers’ remittances remained resilient. The central bank expects the current account deficit to remain within 0-1 percent of GDP this fiscal year.
The MPC also noted that SBP’s foreign exchange reserves had remained stable at around US$21.5 billion, equivalent to three months of import cover, supported by continued foreign exchange purchases and expected higher financial inflows following a staff-level agreement with the International Monetary Fund (IMF).
Highlighting the importance of maintaining policy discipline, the central bank reiterated that prudent monetary and fiscal management, along with the timely implementation of structural reforms, remained essential for safeguarding macroeconomic stability and ensuring sustainable long-term growth.