By Our Correspondent
KARACHI— The State Bank of Pakistan (SBP) on Monday raised its key policy rate by 50 basis points to 12%, ending a period of monetary policy stability as renewed inflationary pressures and geopolitical uncertainty clouded the economic outlook.
The Monetary Policy Committee (MPC) approved the increase by a majority of nine votes to one, citing the intensifying conflict in the Middle East and persistently elevated global energy prices.
In its statement, the committee said geopolitical developments had worsened the inflation outlook, although the impact of the global supply shock on Pakistan’s economy had remained contained so far.
The rate increase aims to anchor inflation expectations, limit the risk of higher energy and food costs spreading across the economy and bring inflation within the SBP’s target range of 5% to 7%, the committee said.
It added that maintaining a positive real policy rate on a forward-looking basis was necessary to bring inflation within the target range over the medium term.
Inflation outlook deteriorates
Pakistan’s headline inflation eased to 10.3% in September from 11% in August. However, the MPC identified renewed tensions in the Middle East and domestic wheat supply disruptions as key factors keeping inflation elevated.
The committee warned that sustained food and energy price pressures could push inflation expectations higher and eventually feed into core inflation.
Other risks include volatility in international commodity prices, unexpected changes in energy tariffs, rising wheat and related product prices, and adverse weather conditions.
Governor explains decision
SBP Governor Jameel Ahmed said the decision reflected a range of factors, particularly the deteriorating inflation outlook and the potential impact of the US-Israel war on Iran on global oil and energy prices.
He said the committee had considered consumer expectations, forecasts by economic analysts, developments in global commodity markets, and trends in exports and remittances.
Ahmed disclosed that one MPC member had a different view and favoured a further increase in the policy rate.
He also acknowledged a deterioration in the current account since the previous monetary policy meeting but said the deficit was expected to remain between zero and 1% of gross domestic product (GDP).
The central bank revised its remittance forecast upwards to $45 billion from $44 billion. Imports were estimated at around $71 billion, while exports were showing improvement but had yet to reach levels needed by the economy, the governor said.
Growth projected at 3.7%
The SBP said foreign exchange reserves had remained stable at around $21 billion and noted Pakistan’s staff-level agreement with the International Monetary Fund (IMF).
The central bank revised its GDP growth estimate for the fiscal year ending June 30, 2027, to 3.7%, while retaining its broader growth projection of 3.5% to 4.5% for fiscal year 2026-27.
The current account deficit is also expected to remain within the previously projected range of zero to 1% of GDP. Resilient remittances, recovering exports and higher financial inflows could help increase foreign exchange reserves beyond their current level, the MPC said.
However, it warned that elevated global commodity prices, tighter international financial conditions, supply constraints, further escalation of the Middle East conflict and adverse climate events could affect the outlook.
The committee stressed that stronger fiscal and external buffers, prudent monetary and fiscal policies, and timely structural reforms were essential to improve economic resilience and support sustainable growth.
First increase since April
Before Monday’s decision, the policy rate stood at 11.5%. The SBP had kept it unchanged since raising it by 100 basis points in April in response to rising global energy prices and supply-chain risks.
The latest increase follows an easing cycle that saw the central bank cut the policy rate by a cumulative 1,050 basis points from its record high of 22% in June 2023, as inflation moderated from multi-decade highs.
Brokerage firm Topline Securities said the latest increase was in line with its expectations.
The IMF last week called on Pakistan to strengthen fiscal policy beyond meeting primary balance targets and maintaining debt sustainability, emphasising policy credibility, economic recovery and greater room for public investment and social spending to support long-term growth.
