The State Bank of Pakistan (SBP) on Monday raised its benchmark policy rate by 100 basis points (bps) to 11.5% on Monday, warning of “intensified risks” to the macroeconomic outlook due to the US-Israel war on Iran.
In a statement, the central bank said that its Monetary Policy Committee (MPC) noted that global energy prices, freight charges and insurance premiums continued to remain significantly above pre-conflict levels due to the Mideast conflict.
Disruptions in the supply chain have also contributed to the prevailing uncertainty, it added.
While the incoming data has been broadly in line with the MPC’s expectations, the impact of the ongoing global developments will be visible in key economic indicators going forward, the SBP warned.
The MPC assessed that inflation is likely to increase and remain above the target range in the next few quarters.
Accordingly, the committee deemed it necessary to maintain a tighter policy stance to keep inflation expectations anchored and contain second-round effects of the current supply shock to bring inflation within the target range, the SBP said.
This will be important to preserve macroeconomic stability, which is necessary for achieving sustainable economic growth, it added.
Since its last meeting, the MPC highlighted several key developments, including a rise in inflation to 7.3% in March and an increase in core inflation to 7.8%. It also noted deteriorating consumer and business confidence in recent surveys.
On the macroeconomic front, real GDP grew by 3.8% in the first half of fiscal year 2026, compared to 1.9% a year earlier. The current account posted a small surplus during July-March FY26.
SBP’s foreign exchange reserves stood at approximately $15.8 billion as of April 24, bolstered by Eurobond issuances, marking Pakistan’s return to international capital markets after more than four years.
The MPC also referenced the staff-level agreement reached with the International Monetary Fund on March 27 as a positive development supporting external financing.
“In light of the above developments and evolving risks, the MPC viewed today’s decision as important to achieve the objective of price stability over the medium term,” the SBP said.
The MPC stressed the need for continued fiscal discipline, structural reforms, and strengthening of external buffers to ensure resilience against global shocks and sustain long-term growth.
Likely rise in inflation
Inflation was projected to increase up to the upper bound of the target range before the start of the Middle East conflict, mainly due to adverse base effect, the SBP said, adding that the energy price shock has led to a surge in fuel prices, which have already begun to seep into core inflation via transport fares.
However, contained food inflation amidst ample supplies is likely to offset some of the impact on headline inflation, the central bank said.
Going forward, the central bank’s MPC assessed that the current supply shock may push inflation to double digits in the coming months before it starts to ease subsequently.
It expects inflation to stay above the upper bound of the target range of 5% to 7% for most of the fiscal year 2027.
The SBP said that the outlook is subject to multiple risks, particularly the duration and intensity of the Mideast conflict, the extent of pass-through of changes in global energy prices to the domestic economy, and potential fiscal slippages.