We expect the SBP to raise the policy rate by 50bps to 12.0% at its October 26, 2026 monetary policy announcement, as rising inflationary pressures and external-sector risks strengthen the case for monetary tightening.

Pakistan’s monetary policy outlook has shifted toward tightening, despite headline inflation moderating to 10.3% YoY in Sep’26 from 11.1% in Aug’26. The rise in core inflation suggests broader price pressures, while renewed geopolitical tensions and crude oil prices around USD100/bbl have heightened concerns about imported inflation, the trade balance, and exchange-rate stability. These developments increase the risk of second-round inflationary effects, strengthening the case for a preventive rate hike.

Oil-Price Shock Strengthens the Case for Tightening

Higher international oil prices pose a significant risk to Pakistan’s inflation and external accounts. A sustained increase could raise domestic fuel, transport, and energy costs, widen the import bill, and put pressure on the current account. The SBP may therefore consider a rate hike to contain inflation expectations, support the rupee and limit the transmission of higher energy costs into broader prices.

Supply-Side Pressures Could Still Support a Hold

A rate hike comes with trade-offs. Because much of the recent inflationary pressure stems from food and energy prices, monetary tightening cannot directly address the underlying supply shock. Higher interest rates could also weigh on private-sector credit, investment and economic activity. If the MPC views the oil-price shock as temporary and inflation expectations as sufficiently anchored, it may keep the policy rate at 11.50% while maintaining a hawkish stance.

Probability Assessment: Risks Tilt Towards a 50bps Hike

We assign a 54% probability to a 50bps hike to 12.0%, against a 39% probability of a hold at 11.50%, while 6% probability of a 100bps hike to 12.5% and only 1% probability of a 25bps hike. The balance of risks has shifted towards tightening, although the supply-driven nature of the inflation shock makes an aggressive hiking cycle less likely. The MPC’s decision will largely depend on the persistence of oil-price pressures, core inflation trends and exchange-rate stability.

PSX Strategy: Maintain a Cautious Stance Ahead of the MPC

We recommend maintaining a cautious portfolio stance ahead of the policy announcement rather than undertaking aggressive repositioning before the outcome. A rate hike could create near-term pressure on leveraged companies and other rate-sensitive sectors, while a hold could trigger a relief rally. Investors should prioritise balance-sheet strength, cash-flow visibility and dividend sustainability, while awaiting greater clarity on the monetary policy trajectory. International oil prices and subsequent inflation readings will remain critical in shaping the market outlook.