The State Bank of Pakistan (SBP) may increase its policy rate by 50 basis points to 12% at its upcoming monetary policy meeting scheduled for Monday, October 26, 2026, according to a report by Bloomberg cited by Mettis Global. The possible increase would mark a shift from the central bank’s recent approach of keeping interest rates unchanged since its previous rate hike in April. The expected decision comes as inflation remains above the central bank’s target range, inflation expectations continue to rise and economic activity shows signs of recovery. However, the central bank has not confirmed any rate adjustment ahead of the scheduled meeting.
Pakistan’s monetary policy outlook reflects competing economic factors. A broadly stable Pakistani rupee and an increase in dollar reserves provide some room for the SBP to maintain the existing policy rate. At the same time, persistent inflationary pressures have strengthened the argument for tighter monetary policy. Inflation has remained in double digits during five of the past six months, exceeding the SBP’s target range of 5% to 7%. Rising energy costs have added to price pressures, creating challenges for households and businesses while complicating the central bank’s efforts to bring inflation back within its desired range.
The real interest rate is another factor influencing the monetary policy outlook. According to the report, Pakistan’s ex-post real interest rate remains below its historical average of approximately 2.5%, suggesting that the current monetary policy stance is less restrictive than it has been historically. The real interest rate reflects the relationship between the nominal policy rate and actual inflation. When inflation rises faster than the nominal interest rate, the real rate can decline, potentially reducing the restrictive effect of monetary policy. A possible increase in the policy rate would therefore be aimed partly at strengthening the central bank’s response to continuing inflationary pressures.
Inflation expectations have also become a concern for policymakers. Rising medium-term expectations can make inflation more persistent when businesses adjust prices and workers seek higher wages in anticipation of continued increases in living costs. Such developments can create additional pressure on prices even when some underlying cost pressures begin to ease. The central bank must therefore consider not only current inflation figures but also the possibility that expectations could influence future price and wage decisions. Persistent inflation above the target range has increased the importance of managing these expectations through monetary policy.
Economic activity has shown signs of improvement, providing another consideration for the upcoming decision. Pakistan’s economy recorded year-on-year growth of 2.8% in the third quarter of 2026, following a contraction of 0.6% in the second quarter, according to the report. The recovery suggests that economic activity has strengthened after a weaker period, potentially giving the central bank more room to tighten monetary policy without placing the same degree of pressure on output as it might during a contraction. Nevertheless, the impact of higher interest rates on borrowing costs, business investment and consumer spending remains an important consideration for the broader economy.
At its previous monetary policy meeting, the SBP’s Monetary Policy Committee maintained the policy rate at 11.5%. The committee highlighted the intensifying conflict in the Middle East, which had contributed to higher global commodity prices and prolonged supply chain disruptions. It also warned that uncertainty surrounding the economic outlook had increased. Headline inflation rose to 11.1% year on year in August, compared with 9.2% in July, while core inflation reached 8.7%. Consumer and business inflation expectations also increased, adding to concerns about the persistence of price pressures.
The committee had expected inflation to ease gradually towards the upper end of its 5% to 7% target range by June 2027. However, it cautioned that risks to this outlook had increased significantly. These risks included volatile international commodity prices, adjustments in electricity and gas tariffs, supply chain disruptions and fluctuations in food prices amid worsening El Niño conditions. These factors could complicate the path towards lower inflation and influence the central bank’s assessment of the appropriate policy stance.
The possible increase to 12% remains a forecast attributed to Bloomberg rather than a confirmed SBP decision. The Monetary Policy Committee’s announcement on October 26 will determine whether the central bank maintains the existing rate of 11.5% or introduces a further increase in response to inflation and economic conditions. A higher rate could help restrain demand and inflation expectations, while also increasing borrowing costs for businesses and consumers. The decision will be closely watched by financial markets, banks, businesses and borrowers seeking clarity on Pakistan’s interest rate outlook and the direction of monetary policy in the coming months.
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