Pakistan’s central bank has tightened policy to limit the spread of high energy and food costs into broader inflation. It kept its growth forecast while warning that the risks facing the economy had increased.
The State Bank of Pakistan (SBP) raised its policy rate by 50 basis points, from 11.5% to 12%, on October 26. Nine of the Monetary Policy Committee’s ten members supported the move, according to the official statement. The new rate takes effect on October 27, following higher-than-expected September inflation and persistently expensive energy.
The SBP said an intensifying Middle East conflict, with limited prospects of a near-term resolution, was keeping global energy prices elevated. Earlier monetary policy adjustments and fiscal discipline had contained the impact on the domestic economy so far, but the inflation outlook had worsened since its previous assessment. The growth and external-account outlooks remained broadly unchanged, although the risks had increased.
Energy and wheat prices drive the decision
Consumer prices rose 10.3% from a year earlier in September. Higher energy, wheat and related-product prices pushed inflation above the committee’s expectation. Core inflation remained elevated at around 8.4%. The SBP identified renewed conflict and domestic supply frictions as two major sources of price pressure.
The committee is concerned that expensive food and energy could raise inflation expectations and subsequently feed into core inflation. It raised rates to curb those expectations and limit further price increases caused by the supply shock. The bank’s latest surveys showed consumer inflation expectations rising while those of businesses declined; confidence weakened in both groups.
“Keep inflation expectations anchored.”
The medium-term inflation target is 5–7%. The committee wants to keep the policy rate sufficiently above expected future inflation. It did not announce a new numerical real-rate threshold or a specific forecast for future inflation. Geopolitical tensions, global commodity prices, unexpected energy-tariff changes, further increases in wheat prices and adverse weather remain risks.
Growth forecast holds as risks rise
The SBP retained its 3.5–4.5% real growth forecast for fiscal 2026–27. Large-scale manufacturing output grew 1.9% year on year in July–August, compared with 0.4% growth in the previous fiscal year’s final quarter. Cement and petroleum-product sales, private-sector credit, the Purchasing Managers’ Index and satellite observations of nighttime lights and nitrogen-dioxide emissions also pointed to recovery, according to the bank.
Initial official estimates for summer crops exceeded expectations. Information and communications technology exports, import volumes and confidence among service firms suggested gradual improvement in services. The Pakistan Bureau of Statistics’ revised 3.7% growth estimate for the previous fiscal year was little changed from its initial figure. For the current year, the committee highlighted the risk of a further escalation in the conflict and climate damage amid worsening El Niño conditions.
| Indicator | Period | Value |
|---|---|---|
| Headline inflation | September 2026, year on year | 10.3% |
| Core inflation | Latest assessment | About 8.4% |
| Real growth forecast | Fiscal 2026–27 | 3.5–4.5% |
| Current-account deficit forecast | Fiscal 2026–27 | 0–1% of GDP |
| SBP foreign-exchange reserves | Level cited on October 26 | About $21.5 billion |
The current account posted an $874 million deficit in the first fiscal quarter. Rice, higher-value-added textiles and service exports were recovering. The SBP also expects workers’ remittances to exceed its earlier forecast. Imports were rising sharply, especially outside energy, as activity recovered and prices increased. The committee retained its annual deficit forecast of 0–1% of GDP. Continued foreign-exchange purchases helped keep SBP reserves around $21.5 billion, equivalent to three months of imports. The bank expects higher financial inflows to lift reserves, though commodity prices, tighter global financing and supply constraints could undermine that outlook.
Tax collection grew 7% year on year in the first quarter and exceeded the target by 33 billion Pakistani rupees. The SBP estimated that transfers of its profits to the budget and restrained spending had kept both the overall and primary fiscal balances in surplus. The bank also reported a staff-level agreement with the IMF. The committee called for a broader tax base, continued fiscal discipline and faster structural reforms to strengthen the economy against external shocks.
What does 12% mean for borrowers?
The 12% policy rate is not a uniform interest rate for every bank loan. The SBP’s explanation of monetary transmission describes how a decision first affects market rates such as repo and the interbank KIBOR benchmark, then lending and deposit conditions. KIBOR is one reference used for household and business loans. The rate offered to a borrower depends on the bank, the product and the loan’s contractual terms.
According to data preceding the decision, private-sector credit grew 14.1% year on year, with growth spanning working capital, fixed investment and consumer finance. Major borrowers included textiles, wholesale and retail trade, and agriculture. Annual broad-money growth also rose from 11.4% on August 28 to 12.7% on October 9. The SBP said lower net government borrowing from banks had created room for private lending.
50 basis points equal 0.50 percentage points. Moving from 11.5% to 12% does not mean the rate has risen by 50%. Changes in customer rates and inflation can take time; the SBP aims to reduce inflation over the medium term, rather than bring every price down immediately.
The next rate meeting is scheduled for December 14
The next monetary policy meeting is listed for December 14, 2026 in the official calendar. The bank says unforeseen developments may change its schedule. Minutes of the October 26 meeting are due in the week ending November 20; the bank has not announced which direction rates will take in December.
The SBP’s decision post appears below. The bank’s 35-minute monetary policy press conference recording from October 26 is available for readers who want to watch the announcement event.
