By Staff Reporter
KARACHI: Pakistan’s central bank lifted its key policy rate by 100 basis points to 11.5% on Monday, delivering its first increase in almost three years as the prolonged Middle East conflict drives up global energy prices and threatens to push inflation higher in the import-dependent economy.
The State Bank of Pakistan’s Monetary Policy Committee said the decision, effective Tuesday, was needed to anchor inflation expectations and contain second-round effects from the supply shock. “The prolonging of the Middle East conflict has intensified risks to the macroeconomic outlook,” the MPC said in its post-meeting statement. Global energy prices, freight charges and insurance premiums “continue to remain significantly above pre-conflict levels,” with supply-chain disruptions adding to uncertainty.
The move reverses part of the aggressive easing cycle that began in June 2024, when the rate stood at a record 22%. The bank has cut by a cumulative 1,150 basis points since then and held the rate steady at 10.5% since December 2025. It comes as Pakistan operates under a $7 billion International Monetary Fund program; the fund has repeatedly warned against premature easing and urged the central bank to keep real interest rates positive.
Headline inflation accelerated to 7.3% in March from a year earlier, breaking above the central bank’s 5%-7% target range, while core inflation rose to 7.8%. The MPC said incoming data had so far been “broadly in line with the MPC’s expectations,” but warned that the impact of higher global energy costs “will be visible in key economic indicators going forward.” It assessed that inflation “is likely to increase and remain above the target range in the next few quarters” and could reach double digits in coming months before easing, staying above the upper bound of the target for most of fiscal 2027.
The committee described the hike as necessary “to keep inflation expectations anchored and contain second-round effects of the current supply shock to bring inflation within the target range. This will be important to preserve macroeconomic stability, which is necessary for achieving sustainable economic growth.”
Beyond the geopolitical shock, the MPC highlighted several other developments since its last meeting. Inflation expectations and business and consumer confidence deteriorated in the latest surveys. Real gross domestic product expanded 3.8% in the first half of fiscal 2026 (July-December), up from 1.9% a year earlier. The current account recorded a small surplus in the July-March period. Foreign-exchange reserves stood at about $15.8 billion as of April 24, even after significant debt repayments, and were supported by the issuance of Eurobonds as Pakistan returned to international capital markets after more than four years. A staff-level agreement was reached with the IMF on March 27.The MPC noted that high-frequency indicators for industry and services showed some moderation in March.
In agriculture, growth prospects eased slightly because of lower-than-expected wheat production. As a result, full-year fiscal 2026 GDP growth is now seen closer to the lower end of the bank’s earlier projected range, with the moderation likely to continue into fiscal 2027. The current account for the full fiscal year is also expected near the lower bound of the prior forecast, despite a sharp worsening in the terms of trade.
On the fiscal side, the deficit remained contained through March, but the MPC said the conflict has complicated management. Higher international oil prices have required targeted subsidies for vulnerable groups, meaning a larger cut in expenditures will be needed to hit the full-year primary surplus target.
The central bank expects reserves to rise above $18 billion by the end of June. It reiterated the importance of continued external-buffer accumulation, fiscal discipline and structural reforms to make the external account more resilient.
The decision aligned with expectations from some market participants. Tresmark, a research-based currency tracker, had forecast exactly a 100-basis-point hike, describing it as a pre-emptive step to protect hot-money flows, counter inflation and stay aligned with rising global bond yields. “This is no longer just an oil story,” said Faisal Mamsa, chief executive officer of Tresmark. “Market relationships are breaking down. Oil, bonds, foreign exchange, and equities are all moving simultaneously, often in conflicting directions, with no clear anchor.”
A higher rate will deliver more rupee income for exporters and overseas remitters but raise costs for importers and add to the government’s domestic borrowing burden at a time when it already relies heavily on banks and corporates for liquidity. The MPC stressed that the inflation outlook remains subject to multiple risks, including the duration and intensity of the Middle East conflict, the extent of pass-through from global energy prices and potential fiscal slippages.
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