State Bank Raises Policy Rate to 12%, Ending Three Straight Holds

Pakistan's central bank raised its benchmark interest rate by 50 basis points to 12% on October 26, 2026, ending three consecutive meetings on hold and resuming the tightening cycle it had paused since April. The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) made the decision by a majority of nine of its ten members, the Associated Press of Pakistan reported, with the new rate effective October 27.

Governor Jameel Ahmad's committee had kept the rate unchanged at 11.5% through its June, July and September meetings, judging that stance appropriate even as inflation ran persistently above target. That pause is now over. The last time the MPC moved rates at all was April 27, 2026, when it raised the rate by 100 basis points, also citing the Middle East conflict.

What's driving the increase

The committee's stated reasoning centres on two pressures compounding each other. The first is the re-escalation of the Middle East conflict, which the MPC said has kept global energy prices elevated with low prospects of near-term resolution — a dynamic that has already pushed Pakistan's own petrol and diesel prices higher in daily revisions through October. The second is domestic: frictions in wheat supply that are adding to food inflation separately from the energy channel.

Headline inflation stood at 10.3% in September, as recorded by the Pakistan Bureau of Statistics, with core inflation around 8.4% — both well above the SBP's medium-term target range of 5-7%. The MPC said the hike was necessary to keep inflation expectations anchored, contain second-round effects from the supply shock, and keep the real policy rate adequately positive looking forward, rather than let a temporary cost shock turn into a more persistent one.

The numbers behind the decision

The committee's statement set out a wider picture of the economy alongside the rate move. The Pakistan Bureau of Statistics has revised FY26 real GDP growth to 3.7%, and the MPC expects FY27 growth to land within a 3.5-4.5% range. Large-scale manufacturing output grew 1.9% in July-August of FY27, a marked pickup from the 0.4% recorded in the fourth quarter of FY26.

On the external side, the current account ran a deficit of $874 million in the first quarter of FY27, which the MPC expects to stay within 0-1% of GDP for the full year, likely around 0.5%. SBP-held foreign exchange reserves stood at $21.49 billion as of October 16, the most recent weekly figure available, equivalent to about three months of import cover. The committee's FY27 projections put remittances at around $45 billion, exports at about $33 billion and imports at about $71 billion. Broad money supply (M2) was up 12.7% year-on-year as of October 9, private sector credit growth stood at 14.1%, and FBR tax collection rose 7% in the first quarter of FY27.

What a higher policy rate means for borrowers

The policy rate is the benchmark the SBP uses to influence what banks charge each other and, in turn, what they charge businesses and households for loans. A 50-basis-point rise makes new and floating-rate borrowing somewhat more expensive just as housing finance and auto loan uptake have both been picking up. It also affects returns on savings products and government securities benchmarked to the policy rate, including the KIBOR-linked lending used widely in corporate borrowing.

Risks the committee flagged

The MPC said the outlook remains exposed to two main risks: a further escalation of the Middle East conflict, which would extend the energy-price pressure already built into its projections, and adverse climate events, with worsening El Niño conditions cited specifically. Both risks point toward the same place Pakistan's inflation readings have kept returning to this year — a price shock originating outside the country's borders that monetary policy on its own cannot fully offset, only lean against. The MPC's next scheduled meeting will show whether October's hike was a one-off response to the current conflict phase or the start of a longer tightening run.

Build Better Pakistan's Economy Desk is tracking the State Bank's policy rate decisions and will update this piece after the next Monetary Policy Committee meeting.