SBP hikes policy rate by 0.5% to 12%

October 26, 2026 (MLN): The Monetary Policy Committee (MPC) raised the policy rate by 50 basis points to 12% at its meeting on October 26, 2026.

The move was in line with market expectations. Speaking at a press conference after the decision, the SBP Governor Jameel Ahmed said the country’s buffers have improved lately, with foreign exchange reserves projected to reach $23bn by December 2026 and $25bn by June 2027.

He said reserves had fallen to below $3bn in February 2023, whereas they now stand at $21.5bn, and that the external account has improved considerably compared with 2022. External debt, he added, has risen by only $5-6bn over the past four years.

The Governor said the quality of reserves is strong, as they have been built by buying dollars from the market rather than through borrowing, and stressed that the reserve momentum must be kept alive because the country’s stability rests on it.

On growth, he said economic activity is expected to remain in the range of 3.5-4.5%. He added that the outlook for sugar, rice and maize is better, while the outlook for cotton is weaker, and that the agriculture sector overall is expected to perform better.

In its monetary policy statement, the MPC said the intensification of the Middle East conflict, and slim chances of its near-term resolution, are keeping global energy prices persistently high.

While the impact on the domestic economy has so far been contained, helped by proactive monetary adjustment and fiscal discipline, the inflation outlook has worsened compared with the earlier assessment, and risks have increased even though the external account and growth outlook remain broadly unchanged.

The committee called the hike necessary to keep inflation expectations anchored, contain second-round effects of the supply shock and bring inflation within the 5-7% target range, which it said will help preserve the macroeconomic stability needed for sustainable growth.

The MPC pointed to several developments since its last meeting. Backed by continued FX purchases, SBP’s reserves held steady at around $21.5bn, equal to three months of import cover.

A staff-level agreement was reached with the IMF. Consumers’ inflation expectations rose while those of businesses fell, and confidence indicators for both weakened in the latest sentiment surveys.

The Pakistan Bureau of Statistics (PBS) kept its revised estimate of FY26 real GDP growth at 3.7%, almost unchanged from the initial figure.

The FBR beat its revenue target in the first quarter of FY27, while major central banks have raised rates in response to rising inflationary pressures and the IMF has lifted its global inflation projections.

Given the growing frequency of global supply shocks, the committee stressed the need to build up external and fiscal buffers to strengthen the economy’s resilience.

It added that continuing the prudent monetary and fiscal policy mix, along with timely structural reforms, is essential for higher and sustainable growth.

On the real sector, the MPC said economic activity has begun to recover gradually from the fourth quarter of FY26. Large-scale manufacturing (LSM) output grew 1.9% year-on-year in July-August FY27, against marginal growth of 0.4% in Q4-FY26.

Cement and POL sales, private sector credit and the Purchasing Managers Index also point to a pickup, a reading backed by satellite data on nighttime lights and NO2 emissions.

The first official estimates of Kharif crops came in better than expected, lifting the agriculture outlook, while services indicators such as ICT exports, import volumes and business confidence among services firms also suggest improving prospects.

The MPC expects real GDP growth to stay within the earlier projected range of 3.5-4.5% in FY27, though it warned of risks from a further escalation of the conflict and from adverse climate events as El Niño conditions worsen.

On the external side, the current account recorded a deficit of $874mn in the first quarter of FY27. Exports are recovering, led by rice, high value-added textiles and services, while workers’ remittances remain resilient and are projected to come in higher than earlier assessed.

Imports are also climbing sharply, led by non-energy items, reflecting the recovery in activity and higher prices.

The MPC expects the FY27 current account deficit to stay within the earlier projected range of 0-1% of GDP, and said this, together with higher financial inflows, should push SBP’s reserves above their current level.

It cautioned that elevated global commodity prices, tighter international financial conditions and supply constraints pose risks to this outlook.

On the fiscal side, FBR tax collection rose 7% year-on-year in the first quarter of FY27, exceeding the target by Rs33bn. With a substantial transfer of SBP profit and contained spending, the overall and primary balances are assessed to have stayed in surplus.

The committee noted that the escalation of the conflict has made fiscal management more difficult, and called for sustained efforts to strengthen discipline, broaden the tax base and speed up structural reforms.

Broad money (M2) growth rose to 12.7% year-on-year as of October 9 from 11.4% on August 28, driven by higher SBP reserves that accelerated growth in net foreign assets.

Growth in net domestic assets slowed as fiscal consolidation and higher external financing reduced net budgetary borrowing from the banking system, leaving banks more room to lend to the private sector.

Private sector credit grew 14.1% year-on-year, with growth spread across working capital, fixed investment and consumer finance, and textiles, wholesale and retail trade and agriculture among the main borrowing sectors.

The MPC expects this momentum to continue alongside the projected pickup in economic activity.

On inflation, the committee identified the re-escalation of the Middle East conflict and domestic wheat supply frictions as the two main factors keeping prices elevated, with both expected to persist over the coming months.

Costlier energy, wheat and related products contributed heavily to headline inflation of 10.3% year-on-year in September, higher than the MPC had expected, while core inflation held steady at around 8.4%.

The committee warned that high food and energy inflation could further lift inflation expectations and seep into core inflation.

It described the rate hike as important to keep the real policy rate adequately positive on a forward-looking basis, which it said is necessary to bring inflation into the target range over the medium term.

The outlook remains exposed to geopolitical tensions, global commodity price swings, unanticipated energy tariff adjustments, further increases in wheat and allied product prices, and adverse weather.

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