SBP hikes policy rate by 100bps to 11.5%

April 27, 2026 (MLN):  The Monetary Policy Committee has decided to increase the policy rate by 100 bps to 11.5% in its meeting held on April 27, 2026.

The decision was primarily driven by mounting inflationary pressures and a significant rise in petrol prices, both of which have contributed to an deteriorating inflation outlook that warranted a firm monetary policy response.

This marks a notable shift from the Committee's previous stance. In its last meeting held on March 9, 2026, the MPC had kept the policy rate unchanged at 10.5%, opting at the time to monitor economic developments before taking further action. However, the subsequent surge in inflation and fuel prices prompted the Committee to adopt a more aggressive tightening posture at this latest sitting.

The 100 bps hike reflects the MPC's commitment to anchoring inflation expectations and restoring price stability in the economy, marking the first rate increase in nearly three years, since the emergency hike to 22% in June 2023.

The move also aligns with the IMF's latest assessment, which signaled support for the SBP's current stance and stressed that monetary policy must remain appropriately tight and responsive to data, warning that renewed spikes in global food and energy prices  particularly amid ongoing geopolitical tensions  could fuel price pressures and unanchor inflation expectations. 

The Committee cited the prolonged Middle East conflict as having materially intensified risks to Pakistan's macroeconomic outlook, with global energy prices, freight charges, and insurance premiums continuing to hold significantly above pre-conflict levels.

While incoming data has broadly aligned with earlier projections, the MPC assessed that inflation is likely to rise and remain above the target range for several quarters ahead, making a tighter policy stance necessary to anchor expectations and contain second-round effects of the ongoing supply shock.

Geopolitical Overhang Drives Rate Decision

The MPC noted that supply chain disruptions stemming from the Middle East conflict have compounded prevailing uncertainty, with their impact on key economic indicators expected to become increasingly visible in the months ahead.

The Committee drew comfort from the fact that Pakistan's macroeconomic fundamentals  including external buffers and fiscal discipline  are considerably stronger at the onset of this shock than during comparable episodes in the recent past, most notably the Russia-Ukraine war of 2022.

The MPC also highlighted the successful staff-level agreement reached with the IMF on March 27, 2026, alongside Pakistan's re-entry into international capital markets after a gap of over four years through a Eurobond issuance, as evidence of improved macroeconomic credibility.

The Committee reiterated that sustaining structural reforms to enhance external account resilience remains critical to navigating the evolving global landscape.

Inflation Rising, Double-Digit Risk Materialising

Headline inflation climbed to 7.3% in March 2026, while core inflation edged up to 7.8%.

The MPC noted that even before the onset of the Middle East conflict, inflation was projected to approach the upper bound of the 5–7% target range, driven by adverse base effects.

The energy price shock has since added further upward pressure, with higher fuel costs already feeding into core inflation through transport fares. The Committee assessed that headline inflation could breach double digits in the coming months, before gradually easing thereafter. Nonetheless, inflation is expected to remain above the upper bound of the target range for most of FY27.

Contained food inflation, supported by ample supplies, is expected to provide only partial relief. The MPC flagged the duration and intensity of the conflict, the extent of energy price pass-through to the domestic economy, and potential fiscal slippages as key risks to the inflation outlook.

Economic Activity Moderating After Strong First Half

Real GDP grew by 3.9% in Q2-FY26, bringing cumulative growth in the first half of FY26 to 3.8%  more than double the 1.9% recorded in the same period last year. Large-scale manufacturing posted robust growth of 5.9% during July–February FY26, and high-frequency indicators across industrial and services sectors showed strong momentum through February.

However, early signs of moderation emerged in March. In agriculture, growth prospects have been tempered by lower-than-anticipated wheat production as per first estimates from the Federal Committee on Agriculture.

The spillover of the ongoing conflict on industrial and services activity in Q4 is expected to bring full-year GDP growth for FY26 closer to the lower bound of the earlier projected range.

The moderation in economic activity is expected to extend into FY27, with the outlook remaining subject to multiple risks tied to the conflict's trajectory.

External Sector Resilient, Reserves Holding

Consecutive current account surpluses in February and March resulted in a small cumulative surplus during July–March FY26, supported primarily by resilient workers' remittances.

The current account for FY26 is now expected to remain closer to the lower bound of the earlier projected range, despite a significant worsening in terms-of-trade.

 On the financing side, the government proactively secured external funding through enhanced bilateral arrangements and the Eurobond issuance, which cushioned the impact of recent debt and liability repayments on SBP's foreign exchange reserves.

As of April 24, 2026, SBP's FX reserves stood at approximately $15.8 billion, with the reserve target now revised upward to above $18 billion by June 2026. The Committee emphasised the continued need to strengthen foreign exchange buffers amid uncertain global economic conditions.

Fiscal Pressures Mount, Tax Shortfall Widens

FBR tax collection fell short of target in March, pushing the cumulative shortfall to Rs611 billion during July–March FY26.

Despite this, financing-side data suggests the fiscal deficit remained contained through March.

However, the Middle East conflict has complicated fiscal management, as the pass-through of higher international oil prices to domestic consumers has necessitated targeted subsidies for vulnerable groups.

The MPC noted that achieving the full-year primary surplus target may require a larger reduction in expenditures.

The Committee stressed the importance of sustained fiscal reforms, including broadening the tax base and curtailing state-owned enterprise losses, to reinforce long-term fiscal sustainability and resilience.

Money and Credit

Broad money growth decelerated to 14.5% as of April 10, down from 16.0% recorded on February 20, driven primarily by a slowdown in net budgetary borrowing from the banking system.

Private sector credit continued to expand at around 13%, in line with improving economic activity and the lagged impact of earlier policy rate reductions.

During July–March FY26, credit flows grew across working capital, fixed investment, and consumer finance. Sectoral concentration remained in textiles, wholesale and retail trade, and chemicals, while a sustained rise in consumer financing pointed to a gradual recovery in household demand.

On the liability side, both currency in circulation and deposits recorded some deceleration since the last MPC meeting.

The Committee reaffirmed that a positive real policy rate, combined with prudent fiscal management, remains essential to preserving macroeconomic stability and supporting sustainable long-term growth.

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