KARACHI, April 27 – The State Bank of Pakistan (SBP) raised its key policy rate by 100 basis points to 11.50% on Monday, warning that intensifying geopolitical tensions in the Middle East have significantly heightened risks to inflation, external stability and overall macroeconomic conditions.
The Monetary Policy Committee (MPC) said the decision, effective April 28, reflects growing concerns over rising global energy prices, elevated freight costs and higher insurance premiums, all of which remain well above pre-conflict levels. It said supply chain disruptions triggered by the ongoing conflict are adding further uncertainty to the economic outlook.
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“The prolongation of the Middle East conflict has intensified risks to the macroeconomic outlook,” the central bank said in its policy statement, adding that inflation is expected to rise further and remain above the target range in the coming quarters.
The SBP said the tightening was necessary to anchor inflation expectations and prevent second-round effects from the external supply shock. It added that maintaining price stability remains essential for sustainable long-term economic growth.
Inflation pressures build amid global shocks
Pakistan’s headline inflation rose to 7.3% in March, while core inflation edged up to 7.8%, the SBP noted. Although inflation was already projected to increase due to base effects, the latest energy shock has accelerated price pressures, particularly in fuel and transport costs.
The central bank warned that inflation could temporarily rise into double digits in the coming months before gradually easing. However, it cautioned that inflation is likely to remain above the official 5–7% target range for most of FY27, depending on global commodity trends and domestic fiscal conditions.
Transport fares have already begun reflecting higher fuel prices, while food inflation remains relatively contained due to adequate domestic supplies, partially offsetting the broader price impact.
Growth slows as risks rise
On the real economy, the SBP said Pakistan’s GDP grew 3.8% in the first half of FY26, compared with 1.9% in the same period last year, reflecting broad-based improvement across sectors.
Large-scale manufacturing expanded by 5.9% during July–February, supported by improved industrial activity and stronger services sector performance earlier in the fiscal year.
However, the central bank noted signs of moderation in March across high-frequency indicators, suggesting that momentum is weakening as external pressures rise.
Agriculture growth has also softened, with lower-than-expected wheat output contributing to downward revisions. The SBP warned that spillover effects from the Middle East conflict could further weigh on industrial output and services in the fourth quarter, pushing FY26 growth toward the lower end of earlier projections.
It added that growth in FY27 is likely to slow further, though the outlook remains uncertain and dependent on geopolitical developments.
External account shows resilience but risks remain
Despite global headwinds, Pakistan’s external account posted a small current account surplus during July–March FY26, supported primarily by strong workers’ remittances.
The SBP said the current account is now expected to remain near the lower end of its earlier forecast range, even as terms of trade deteriorate due to higher import prices.
On the financing side, Pakistan raised external inflows through bilateral arrangements and a return to international capital markets with Eurobond issuance after more than four years. These inflows helped offset debt repayments and supported foreign exchange reserves.
SBP reserves stood at around $15.8 billion as of April 24, 2026, and are projected to rise above $18 billion by June 2026, the central bank said.
However, the MPC stressed the need to further strengthen external buffers given heightened global volatility and uncertain capital flows.
Fiscal pressures widen amid energy shock
The SBP flagged emerging fiscal challenges, noting that Federal Board of Revenue (FBR) tax collection fell short of targets in March, widening the cumulative shortfall to Rs611 billion for July–March FY26.
While the overall fiscal deficit remained contained, the central bank said rising global oil prices are increasing pressure on public finances due to the need for targeted subsidies to protect vulnerable households.
To meet the primary surplus target for the full year, the government may need to implement additional expenditure cuts, it warned.
The MPC reiterated the importance of structural fiscal reforms, including broadening the tax base and reducing losses from state-owned enterprises, to improve long-term fiscal sustainability.
Money and credit trends show mixed signals
Broad money growth slowed to 14.5% as of April 10, down from 16% in February, reflecting reduced government borrowing from the banking sector.
Private sector credit, however, continued to grow at around 13%, supported by improving economic activity and lagged effects of earlier monetary easing. Credit expansion was recorded across working capital, fixed investment and consumer financing.
Key sectors driving credit demand included textiles, wholesale and retail trade, and chemicals, while rising consumer loans indicated a gradual recovery in household demand.
Policy outlook remains tight
The SBP said the latest decision aims to ensure medium-term price stability while balancing growth risks in a highly uncertain global environment.
It emphasized that continued fiscal discipline, stronger external buffers and structural reforms are critical to stabilizing the economy.
“The Committee viewed today’s decision as necessary to preserve macroeconomic stability,” the statement said, adding that inflation risks remain tilted to the upside due to external shocks and domestic vulnerabilities.
Analysts expect monetary policy to remain cautious in the coming months, with further rate adjustments dependent on inflation trends, oil prices and developments in the Middle East conflict.
The SBP’s move marks a shift back toward tightening after a period of relative stability, underscoring Pakistan’s vulnerability to external shocks as it navigates a fragile economic recovery.