The State Bank of Pakistan (SBP) has raised its policy rate by 50 basis points to 12%, effective October 27, 2026, as persistent inflationary pressures and rising international energy prices complicate the country’s economic outlook. The decision was widely anticipated by financial markets, but the latest monetary policy statement signals a broader shift in the central bank’s approach to inflation management. The Monetary Policy Committee (MPC) has become more united in supporting tighter monetary conditions, while acknowledging that bringing inflation back within its target range will take longer than previously expected. The revised assessment reflects growing concerns over geopolitical developments, domestic food prices and the potential impact of higher oil prices on the economy. The central bank has also indicated that inflation during the fiscal year 2026-27 is likely to exceed its earlier projections, creating uncertainty around the timing and scale of future interest rate decisions.
The voting pattern within the MPC highlights the change in its assessment of economic risks. On September 14, the committee voted seven to three to maintain the existing policy rate, with three members advocating a 100-basis-point increase. In the latest meeting, nine of the ten members supported raising the rate, while one member favoured a larger adjustment. SBP Governor Jameel Ahmed explained that the debate has increasingly shifted from whether monetary tightening is necessary to determining the pace at which it should be implemented. The central bank has also revised its inflation timeline. Its September statement anticipated that inflation would gradually approach the upper limit of the 5% to 7% target range by June 2027. The latest statement removes that deadline and instead expects inflation to return to the target range over the medium term, reflecting a less favourable outlook following recent geopolitical developments.
Pakistan’s interest rate trajectory has changed considerably over the past three years. The policy rate reached a peak of 22% in June 2023 and remained at that level for eight consecutive monetary policy meetings before the easing cycle began in April 2024. Subsequent reductions totalled 1,150 basis points, bringing the rate down to 10.5% in December 2025. However, rising energy prices associated with the Middle East conflict prompted the central bank to reverse direction in 2026. Following two increases totalling 150 basis points, the policy rate has now reached 12%. The latest adjustment comes as headline inflation climbed to 10.3% in September, exceeding the MPC’s expectations because of higher energy costs and increases in wheat and related products. Core inflation has remained around 8.4%, indicating that price pressures extend beyond volatile food and energy components.
The central bank’s decision also reflects a decline in the real policy rate, which measures the difference between the nominal interest rate and inflation. In September 2025, the policy rate stood at 11% while inflation was 5.8%, leaving a positive real rate of 5.2 percentage points. By September 2026, the policy rate had reached 11.5%, while inflation had risen to 10.3%, reducing the difference to just 1.2 percentage points. Following the latest increase to 12%, the real rate is approximately 1.7 percentage points against headline inflation and 3.6 percentage points against core inflation. The SBP wants the real policy rate to remain adequately positive based on the expected inflation trajectory. However, the committee has opted for a smaller increase because economic growth is still recovering from recent disruptions. Governor Ahmed said the Middle East conflict reduced economic growth to 2% in the final quarter of FY26, compared with an average of 4.2% during the first three quarters.
Despite these challenges, the SBP has maintained its gross domestic product growth forecast of 3.5% to 4.5% for FY27 and expects economic activity to improve from the 3.7% growth recorded in FY26. The outlook is supported by agricultural production, with sugarcane, rice and maize crops expected to exceed their targets. Large-scale manufacturing grew by 1.9% during July and August, following growth of just 0.4% in the preceding quarter. A 50-basis-point increase allows the central bank to respond to inflation without placing excessive pressure on the recovery. Market expectations had largely reflected this adjustment, with the three-month Treasury bill yielding 12% at the October 14 auction. A survey conducted before the decision found that 44.4% of respondents expected a 50-basis-point increase. The 12-month Treasury bill yield stood at 12.5%, approximately 50 basis points above the new policy rate, suggesting that markets currently consider the adjustment broadly consistent with prevailing monetary conditions.
Pakistan’s external financial position remains one of the stronger elements of the economic outlook, although financing requirements continue to pose risks. Foreign exchange reserves stand at approximately $21.5 billion, equivalent to around three months of import cover, while Pakistan has reached a staff-level agreement with the International Monetary Fund (IMF). Governor Ahmed has projected that reserves could increase to $23 billion by December 2026 and $25 billion by June 2027, with the central bank aiming to exceed the latter target. He said the reserve accumulation has primarily resulted from purchases in the foreign exchange market rather than additional borrowing. This represents a significant improvement from February 2023, when reserves had fallen below $3 billion. The country’s external debt profile has also changed, with approximately 80% of external debt now owed to multilateral and bilateral lenders, compared with 55% in early 2023. Average debt maturity has increased from less than three years to more than four years, providing some improvement in repayment flexibility.
Nevertheless, external debt servicing remains substantial, with approximately $21.5 billion due during FY27, comprising $17.5 billion in principal repayments and $4 billion in interest. Around $7.3 billion in bilateral debt is expected to be rolled over, while a $3 billion Saudi deposit has also been rolled over, with the relevant documentation still being processed. These arrangements would leave net repayments of approximately $10 billion. About $5 billion had already been repaid during the first four months, leaving roughly $5.5 billion in remaining repayments. The projected reserve accumulation depends on the availability of additional financing, including the remaining Panda bond issuance, multilateral inflows and IMF disbursements after accounting for debt servicing. Pakistan has also benefited from a $3 billion Eurobond issued following credit rating upgrades from all three rating agencies. The Ministry of Finance has invited proposals for additional Eurobond issuances, with the timing expected to depend on financing requirements and market pricing. The government has reportedly declined some short-term lending offers because of their cost and maturity conditions, but achieving the reserve targets will still depend on continued access to international financing.
The current account remains a significant concern for the central bank. Pakistan recorded a current account deficit of $874 million during July-September, compared with $594 million during the same period a year earlier. The deficit has already reached almost three times the full-year FY26 shortfall of $304 million. Governor Ahmed acknowledged that the external account had deteriorated since the previous monetary policy meeting. The SBP now expects the FY27 current account deficit to remain slightly above the midpoint of its projected range of zero to 1% of GDP, compared with its earlier expectation near the lower end. The revised outlook incorporates imports of approximately $71 billion and exports of $32.5 billion to $33 billion, up from $30.8 billion in FY26. Remittance projections have also increased from $44 billion to $45 billion. Overseas Pakistanis sent $10.9 billion during the first quarter, while the two Eid festivals expected during the second half of the fiscal year could contribute at least another $1 billion.
Energy prices remain a major source of uncertainty for both inflation and the external account. The SBP has raised its oil price assumption by approximately $10 per barrel to nearly $90, reflecting prevailing prices and futures market expectations. However, crude oil prices trading above $114 per barrel create a risk that the assumption may prove too optimistic. If elevated prices persist, Pakistan could face a larger import bill, additional pressure on consumer prices and a wider current account deficit. The central bank has also highlighted domestic wheat supply constraints as a factor behind elevated inflation, meaning that food availability and agricultural market conditions will remain important alongside international energy prices. Meanwhile, the SBP has reiterated that the exchange rate remains market-determined. Governor Ahmed cautioned against interpreting the real effective exchange rate index in isolation because it uses a 2010 base year. The central bank’s priorities include reducing the gap between interbank and open-market exchange rates, reforming exchange companies and curbing smuggling, hundi and hawala transactions, and trade-based money laundering.
Fiscal performance and domestic credit conditions add further complexity to the policy outlook. Federal Board of Revenue collections exceeded the first-quarter target by Rs33 billion, but year-on-year growth remained at 7%, below the average consumer price inflation rate of 10.2%. After adjusting for inflation, tax revenue contracted by approximately 3%. The fiscal and primary surpluses recorded during the quarter therefore relied substantially on a transfer of profits from the SBP and restraint in government expenditure rather than strong real growth in tax collections. At the same time, domestic demand continues to expand, with private-sector credit growing by 14.1% and broad money increasing by 12.7%. These figures indicate real private-sector credit growth of approximately 3.5%, suggesting that monetary conditions have not become sufficiently restrictive to significantly slow borrowing and spending. The SBP describes credit expansion as broad-based and expects the trend to continue, leaving the possibility of additional tightening if demand continues to sustain inflationary pressures.
The next monetary policy decision will depend on developments in international oil prices, domestic wheat supplies, inflation expectations and external financing. The gap between the central bank’s oil assumption of approximately $90 per barrel and market prices above $110 represents a major risk to its current forecasts. Consumer inflation expectations have also increased, raising concerns that higher prices could spread into core inflation, which is already around 8.4%. Any further increase in underlying inflation would strengthen the argument for additional interest rate increases. At the same time, Pakistan must continue building reserves towards $23 billion by December 2026 while managing a rising import bill and significant external debt repayments. Timely proceeds from future Eurobond and Panda bond issuances, alongside multilateral financing and IMF disbursements, will be important in maintaining the external position. The latest 50-basis-point increase reflects the SBP’s attempt to balance inflation control with economic recovery, but the revised inflation timeline and growing external pressures suggest that monetary policy will remain sensitive to incoming economic data throughout FY27.
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