SBP raises policy rate to 11.5% owing to Middle East conflict, associated macroeconomic risks

The State Bank of Pakistan, Monday, increased the policy rate by 100 basis points to 11.50 percent in view of conflict in the Middle East and its subsequent implications on macroeconomic outlook as well as increasing inflationary expectations

KARACHI, (APP - UrduPoint / Pakistan Point News - 27th Apr, 2026) The State Bank of Pakistan, Monday, increased the policy rate by 100 basis points to 11.50 percent in view of conflict in the Middle East and its subsequent implications on macroeconomic outlook as well as increasing inflationary expectations.

The Monetary Policy Committee (MPC), in a meeting here at SBP reviewed the geopolitical scenario and key developments, and decided to increase the policy rate to preserve macroeconomic stability, which is necessary for achieving sustainable economic growth, the Monetary Policy Statement issued by the central bank stated.

The Committee noted the risks to the macroeconomic outlook and the uncertainty arising from the elongated Middle East conflict, particularly the higher global energy prices, freight charges and insurance premiums.

The MPC further noted that inflation rose to 7.3% in March and core inflation inched up to 7.8% while inflation expectations and confidence of consumers and businesses affected. “Inflation is likely to increase and remain above the target range in the next few quarters,” the Committee assessed.

Considering the upcoming impacts of these global developments on key economic indicators, the MPC 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 committee observed positive developments like 3.8% real GDP growth in H1-FY26, surplus in the current account during July-March FY26, stable foreign reserves of SBP at around $15.8 billion despite significant debt repayments, issuance of Eurobonds, and the staff level agreement with the IMF.

However, the MPC viewed policy tightening as vital to achieve the objective of price stability over the medium term, reiterating the important role of the continued build-up of external buffers and fiscal discipline.

“These efforts have contributed to stronger initial economic conditions at the start of the ongoing geopolitical conflict as compared to similar shocks in the recent past,” the MPC noted and also emphasized the importance of undertaking structural reforms to make the external account more resilient to evolving global landscape and to ensure sustainable economic growth.

The Committee observed a broad-based improvement in economic activity in Q2-FY26, with a 3.9% Real GDP growth, bringing cumulative growth in H1-FY26 to 3.8%. Large-scale manufacturing posted a robust performance, growing by 5.9 percent during July–February FY26.

However, the MPC noted that high-frequency industrial and services sector indicators showed some signs of moderation in March while in agriculture, growth prospects have moderated slightly, owing to lower than anticipated wheat production.

“This, along with the expected spillover of the ongoing Middle East conflict on industrial and services sector activity in Q4, is expected to result in real GDP growth for FY26 turning out closer to the lower bound of the earlier projected range,” it

stated.

In the External Sector, the consecutive surpluses in February and March led to a cumulative current account surplus during July-March FY26, supported by resilient workers’ remittances.

The MPC assessed that the current account in FY26 is now likely to remain closer to the lower bound of the earlier projected range, despite a challenging external environment. On the financing side, the government has proactively raised external financing via enhanced bilateral arrangements and issuance of Eurobonds, which cushioned the impact of the recent debt and liability repayments on SBP’s FX reserves.

SBP’s FX reserves are now assessed to reach above $18 billion by June 2026, the Committee assessed in this regard,

and emphasized the need for further strengthening in FX buffers amidst the uncertain global economic conditions.

The committee indicated shortfalls in FBR tax collection during July-March FY26 along with challenges surfacing from the ongoing Middle East conflict, suggesting large expenditure cuts to achieve the targeted full-year primary surplus for ensuring support for vulnerable groups through targeted subsidies to bear the pass-through of higher international oil prices to domestic markets.

The MPC, reviewed that the broad money growth decelerated to 14.5% as of April 10, while credit to the private sector continued to grow around 13%, in line with improving economic activity and the lagged impact of earlier policy rate cuts.

During July-March FY26, the private sector credit flows expanded across working capital, fixed investment and consumer finance; but sectoral flows were concentrated in textiles, wholesale and retail trade, and chemicals, while the sustained rise in consumer financing points to recovery in household demand.

The committee reviewing inflation trends, indicated the potential energy price shock impact over the core inflation, though contained food inflation amidst ample supplies is likely to offset some of the impact on headline inflation, assessing that the current supply shock may push inflation to double digits in the coming months before it starts to ease subsequently.

However, inflation is expected to stay above the upper bound of the target range of 5-7 percent for most of FY27. The MPC noted that this outlook is subject to multiple risks, particularly the duration and intensity of the ongoing conflict, extent of pass-through of changes in global energy prices to domestic economy, and potential fiscal slippages.