KIBOR jumps up to 99 bps after SBP hikes policy rate to 11.5%

April 28, 2026 (MLN): Pakistan’s Karachi Interbank Offered Rate (KIBOR) surged sharply across all tenors on Tuesday after the State Bank of Pakistan’s Monetary Policy Committee raised the policy rate by 100 basis points to 11.5%, marked a clear shift to a more hawkish stance amid rising inflation risks and persistently elevated global energy prices.

The central bank had previously kept the policy rate unchanged at 10.5% in its March 9, 2026 meeting, but a deteriorating inflation outlook driven by higher fuel prices and base effects prompted the reversal.

Headline inflation rose to 7.3% in March 2026, while core inflation reached 7.8%. The MPC now expects inflation to move above 10% in the coming months before gradually easing, though it is likely to remain above the 5–7% target band for most of FY27.

Following the decision, short-term KIBOR tenors reacted most aggressively, with 1-week and 2-week rates climbing by nearly 99 basis points.

The 1-month tenor rose by 94 basis points, showing immediate repricing in money markets.

Longer tenors adjusted more modestly, with 6-month and 1-year rates increasing by around 43 and 34 basis points respectively, suggesting that market participants still expect some stabilization in the medium term.

The MPC highlighted that the ongoing geopolitical conflict in the Middle East remains a key inflationary risk, keeping global oil prices, freight costs, and insurance premiums elevated.

These pressures are expected to weigh on economic activity in the final quarter of FY26, potentially pulling full-year GDP growth toward the lower end of earlier projections.

Despite this, Pakistan’s economy had shown relative resilience, with growth recorded at 3.9% in Q2-FY26 and 3.8% in the first half of the fiscal year, significantly higher than the 1.9% seen in the same period last year.

On the external front, Pakistan’s position showed some improvement, with the current account posting consecutive surpluses in February and March, supported by strong remittance inflows.

This helped generate a small cumulative surplus for July–March FY26. Foreign exchange reserves stood at around $15.8bn as of April 24, while the target has been revised upward to above $18bn by June 2026.

Developments such as the country’s return to international capital markets through a Eurobond issuance and a staff-level agreement with the IMF in March were cited as signs of improving macroeconomic stability.

However, fiscal pressures remain significant, with tax revenues falling short of targets and the Federal Board of Revenue recording a cumulative shortfall of Rs611bn for the July–March period.

Rising energy costs have also increased the need for targeted subsidies, adding strain to fiscal management.

Meanwhile, broad money growth slowed to 14.5%, while private sector credit continued to expand at around 13%, supported by improving economic activity.

The central bank reiterated that maintaining a positive real interest rate is essential to anchoring inflation expectations and ensuring macroeconomic stability.

The latest policy move is also aligned with IMF recommendations, which emphasize the need for a tight and data-driven monetary stance amid renewed global uncertainty in energy and food markets.

Copyright Mettis Link News