State Bank increases interest rate by 50 basis points as elevated energy prices and rising inflation worsen the economic outlook, while GDP growth is projected at 3.5–4.5% for FY2027.
Karachi, October 26, 2026: The State Bank of Pakistan (SBP) has raised its key policy rate by 50 basis points to 12 percent, citing escalating tensions in the Middle East, persistently elevated global energy prices and increasing inflationary risks.
In its Monetary Policy Statement issued on October 26, 2026, the Monetary Policy Committee (MPC) announced that the revised rate would take effect from October 27. The decision was supported by nine of the committee’s ten members.
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The central bank said the intensification of the Middle East conflict and limited prospects for its near-term resolution had worsened Pakistan’s inflation outlook. Although the impact of the global supply shock on the domestic economy had remained contained so far, the MPC considered a rate increase necessary to anchor inflation expectations and prevent further inflationary pressures.
The SBP aims to bring inflation within its target range of 5–7 percent over the medium term.
Inflation rises above expectations
Pakistan’s headline inflation reached 10.3 percent year-on-year in September, exceeding the MPC’s expectations. Elevated energy prices and domestic wheat supply disruptions were identified as major contributors.
Core inflation remained elevated at around 8.4 percent, raising concerns that higher food and energy costs could feed into broader prices and inflation expectations.
The committee warned that geopolitical tensions, volatile global commodity prices, possible energy tariff adjustments, rising wheat prices and adverse weather conditions could further complicate the inflation outlook.
Economic growth projected at 3.5–4.5%
Despite the challenging external environment, the SBP expects Pakistan’s real gross domestic product (GDP) to grow between 3.5 and 4.5 percent in fiscal year 2026-27.
Large-scale manufacturing output grew by 1.9 percent year-on-year during July and August FY2027, compared with marginal growth of 0.4 percent in the fourth quarter of FY2026.
Cement and petroleum, oil and lubricants (POL) sales, private-sector credit and purchasing managers’ indicators also pointed towards a gradual recovery in economic activity. Initial estimates for Kharif crops were better than anticipated, improving the agricultural outlook.
However, the central bank cautioned that further escalation of the Middle East conflict and adverse climate conditions could threaten the growth outlook.
Current account deficit reaches $874 million
Pakistan recorded a current account deficit of $874 million during the first quarter of FY2027.
Exports showed signs of recovery, supported by rice, high-value-added textiles and services. Workers’ remittances also remained resilient and were projected to exceed earlier estimates.
However, imports increased sharply, driven by non-energy products, improving economic activity and higher prices.
The SBP expects the current account deficit to remain within its earlier projected range of zero to 1 percent of GDP for FY2027. Higher financial inflows are expected to help increase foreign exchange reserves beyond their current level.
The central bank reported that its foreign exchange reserves remained stable at around $21.5 billion, equivalent to approximately three months of import cover.
Fiscal performance and private-sector credit
The Federal Board of Revenue (FBR) collected 7 percent more tax revenue year-on-year during the first quarter of FY2027, exceeding its target by Rs33 billion.
The MPC assessed that the fiscal and primary balances remained in surplus during the quarter, supported by substantial SBP profit transfers and contained government expenditure.
Meanwhile, private-sector credit grew by 14.1 percent year-on-year, with borrowing extending across working capital, fixed investment and consumer finance. Textiles, wholesale and retail trade, and agriculture were among the major borrowing sectors.
The MPC emphasised that continued fiscal discipline, a prudent monetary policy stance, a broader tax base and timely structural reforms would be essential to strengthen economic resilience.
The committee also noted that major central banks had raised interest rates amid renewed inflationary pressures, while the International Monetary Fund had revised its global inflation projections upwards.
The latest rate increase underscores the SBP’s priority of containing inflation and preserving macroeconomic stability amid heightened external risks.