SBP raises interest rate to 12% amid inflation fears

The State Bank of Pakistan (SBP) has raised its benchmark interest rate by 50 basis points to 12% as rising energy and food prices increase inflationary pressures amid escalating geopolitical tensions.

SBP Governor Jameel Ahmad announced the decision on Monday after a meeting of the Monetary Policy Committee (MPC) in Karachi. The policy rate has increased from 11.5%, marking the central bank’s first rate hike since June.

Ahmad said rising global energy prices and geopolitical uncertainty had worsened the economic outlook. He noted that petroleum prices had remained above $100, adding to inflationary risks. Nine of the committee’s 10 members voted in favour of the increase.

The governor said inflation expectations and the outlook for the current account deficit had deteriorated since the previous monetary policy meeting in September. Higher wheat prices have also added to concerns about the cost of living.

The SBP expects Pakistan’s economy to grow between 3.5% and 4.5% during the current fiscal year. However, the governor acknowledged that exports remained below the desired level despite signs of improvement.

Pakistan’s exports are projected to reach $32.5 billion in FY2026-27, while imports are expected to total $71 billion. Workers’ remittances are forecast to reach $45 billion, providing support to the country’s external finances.

According to the monetary policy statement, year-on-year headline inflation rose to 10.3% in September, exceeding the MPC’s expectations. Higher energy costs, rising wheat prices and increases in other food items contributed to the acceleration.

Core inflation remained elevated at approximately 8.4%. The committee warned that persistent increases in food and energy prices could push inflation expectations higher and eventually place further pressure on underlying inflation.

The SBP identified geopolitical tensions, volatile international commodity prices, possible energy tariff adjustments, rising wheat prices and adverse weather conditions as major risks to the inflation outlook.

Pakistan recorded a current account deficit of $874 million during the first quarter of FY2026-27. Exports showed signs of recovery, supported by rice, value-added textiles and services, while remittances remained resilient.

Imports also increased sharply because of stronger non-energy purchases, improving economic activity and higher prices.

Despite these pressures, the SBP expects the current account deficit to remain within its earlier forecast of 0% to 1% of gross domestic product for the fiscal year. The central bank also expects additional financial inflows to help strengthen foreign exchange reserves.

The country’s foreign exchange reserves remained stable at around $21.5 billion, equivalent to approximately three months of import cover, according to the statement.

The central bank also highlighted Pakistan’s staff-level agreement with the International Monetary Fund (IMF).

During the first quarter of the fiscal year, Federal Board of Revenue tax collection increased by 7% year-on-year, exceeding the target by Rs33 billion. Both the overall fiscal balance and the primary balance were assessed to have remained in surplus.

However, the MPC cautioned that the intensifying conflict in the Middle East had complicated fiscal management. It stressed the importance of maintaining fiscal discipline, expanding the tax base and accelerating structural reforms to protect economic stability amid rising external and domestic pressures.