The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) opted to increase the benchmark policy rate by 50 basis points, raising it from 11.5 per cent to 12.0 per cent. The decision, finalized during the MPC meeting on October 26, 2026, marks the central bank’s first rate hike following three consecutive meetings where rates were kept unchanged.
According to the official monetary policy statement, the move was backed by a majority vote of nine out of ten committee members, with effect from October 27, 2026. One member favored a larger adjustment.
Deteriorating Inflation Outlook and Global Supply Shocks
Addressing media and market analysts following the announcement, SBP Governor Jameel Ahmad emphasized that the decision was necessitated by a shifting external landscape and renewed inflationary pressures.
“The inflation outlook deteriorated significantly because of the ongoing geopolitical crisis, including the US-Iran conflict, and other developments in the Middle East,” Ahmad stated, pointing out that international crude oil prices have remained stubbornly elevated above $100 per barrel. These global energy shocks, compounded by domestic factors such as a recent uptick in wheat and allied product prices over the preceding two to three months, created a challenging environment for price stability.
September headline inflation was recorded at 10.3 per cent. The central bank noted that the 50 bps tightening was crucial to anchor inflation expectations, stave off second-round effects from supply-side pressures, and steer inflation back toward the medium-term target range of 5 to 7 per cent.
Macroeconomic Performance and Reserves
Despite external headwinds, the MPC highlighted several resilient macroeconomic indicators since its previous policy review:
- Foreign Exchange Buffers: Supported by ongoing central bank foreign exchange purchases, SBP reserves remained steady at approximately $21.5 billion, providing roughly three months of import cover. Governor Ahmad expressed optimism that reserves could scale further upwards by the close of the fiscal year.
- External Account: Pakistan recorded a first-quarter FY27 current account deficit of $874 million, while worker remittances performed strongly, pulling in nearly $11 billion ($10.9 billion) in Q1. Consequently, the SBP revised its full-year remittance projection upward from $44 billion to $45 billion.
- Real Sector Activity: Economic activity has maintained a gradual recovery trajectory compared to the fourth quarter of FY26, with Large Scale Manufacturing (LSM) output expanding by 1.9 per cent year-on-year during July–August FY27. The central bank maintained its real GDP growth forecast for FY27 within the range of 3.5 to 4.5 per cent.
- Fiscal and Monetary Discipline: Broad money (M2) growth expanded to 12.7 per cent year-on-year as of October 9, while the Federal Board of Revenue (FBR) successfully exceeded its tax collection targets for the first quarter of FY27. Additionally, a staff-level agreement was successfully reached with the International Monetary Fund (IMF).
Market Implications and Outlook
The 50 basis point hike was largely anticipated by market participants tracking regional geopolitical volatility. Analysts note that while the tightening stance may temporarily increase borrowing costs for businesses and consumers, it underscores the SBP’s proactive commitment to preserving macroeconomic stability and safeguarding the local currency against external vulnerabilities.
The Monetary Policy Committee will convene for its next review meeting on December 14, 2026, to reassess domestic and international economic indicators.