SBP Hikes Policy Rate to 11.5% After Three Years

The State Bank of Pakistan (SBP), through its Monetary Policy Committee (MPC), has increased the benchmark policy rate by 100 basis points to 11.50%, marking the first upward revision in nearly three years. The decision reflects mounting inflationary risks arising from heightened geopolitical tensions and escalating global energy prices.

The adjustment was finalized during the MPC’s third meeting of 2026 and broadly aligned with prevailing market expectations, which had already priced in a tightening stance amid instability in the Middle East and associated disruptions in global energy supply chains.

In its official policy statement, the MPC highlighted that the prolonged regional conflict has materially increased risks to Pakistan’s macroeconomic outlook. It noted that international energy prices, freight costs, and insurance premiums remain elevated relative to pre-conflict levels, while supply chain disruptions continue to contribute to uncertainty.

Although recent economic data has remained broadly consistent with projections, the MPC emphasized that the full impact of these external shocks is yet to materialize in key indicators. Accordingly, inflation is expected to rise further and remain above the targeted range over the coming quarters.

The Committee stated that maintaining a tighter monetary stance is necessary to anchor inflation expectations and mitigate second-round effects of supply-side shocks, while safeguarding overall macroeconomic stability as a prerequisite for sustainable growth.

From a macroeconomic perspective, headline inflation increased to 7.3% in March, with core inflation rising to 7.8%. Survey-based indicators pointed to deteriorating inflation expectations and a decline in consumer and business confidence.

Economic growth remained relatively resilient, with real GDP expanding by 3.8% during the first half of FY2026, compared to 1.9% in the corresponding period of the previous year. The external sector also showed relative stability, with a modest current account surplus recorded during July–March FY2026.

Despite substantial external debt repayments, the SBP’s foreign exchange reserves stood at approximately USD 15.8 billion as of April 24, 2026. This position was supported by Pakistan’s re-entry into international capital markets through Eurobond issuance after a gap of over four years.

The MPC further noted that a staff-level agreement with the International Monetary Fund (IMF), reached on March 27, 2026, has provided additional support to the country’s macroeconomic framework.

On the real sector front, high-frequency indicators for industrial and services activity suggested moderation in March. Agricultural prospects have also weakened marginally due to lower-than-expected wheat output, as per preliminary estimates.

The Committee cautioned that spillover effects from ongoing geopolitical developments are likely to weigh on industrial and services performance in the fourth quarter, potentially placing FY2026 GDP growth toward the lower end of earlier projections. This moderation may extend into FY2027, subject to the duration and severity of external risks.

In terms of the external account, the MPC expects the current account balance for FY2026 to remain within earlier projected limits despite adverse global conditions. Foreign exchange reserves are projected to exceed USD 18 billion by June 2026, supported by anticipated inflows.

On the fiscal side, the deficit has remained contained thus far; however, rising global oil prices are complicating fiscal management and may necessitate targeted subsidies for vulnerable segments. The Committee indicated that achieving the full-year primary surplus target may require additional expenditure rationalisation.

Looking ahead, the MPC warned that inflationary pressures may intensify in the near term, potentially entering double-digit territory before stabilising. Inflation is expected to remain above the upper bound of the 5–7% target range for a significant portion of FY2027.

The outlook remains subject to multiple risks, including prolonged geopolitical tensions, the domestic pass-through of international energy price increases, and potential fiscal slippages.

It is pertinent to note that in its previous meeting held on March 9, 2026, the MPC had maintained the policy rate at 10.5%, indicating a shift toward a tightening stance in the latest decision.