The State Bank of Pakistan (SBP) has increased the policy rate by 100 basis points to 11.5 percent in today’s monetary policy meeting, according to its latest monetary policy meeting on Monday.
Including today’s increase, the central bank has now increased the benchmark rate for the first time after two consecutive sessions of no change.
The Committee noted that the prolonged Middle East conflict has intensified risks to the macroeconomic outlook. In particular, global energy prices, freight charges, and insurance premiums continue to remain significantly above pre-conflict levels. Furthermore, supply chain disruptions have contributed to prevailing uncertainty.
While incoming data has broadly remained in line with the MPC’s expectations so far, the impact of these global developments will become visible in key economic indicators going forward. Against this backdrop, the Committee assessed that inflation is likely to increase and remain above the target range in the coming quarters.
Accordingly, 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, thereby bringing inflation within the target range. This will be important for preserving macroeconomic stability, which is essential for achieving sustainable economic growth.
Apart from geopolitical developments in the Middle East, the MPC noted the following key developments since its last meeting. First, inflation rose to 7.3 percent in March, while core inflation edged up to 7.8 percent. Second, inflation expectations and confidence among consumers and businesses deteriorated in the latest surveys.
Third, real GDP grew by 3.8 percent in H1-FY26 compared with 1.9 percent during the same period last year. Fourth, the current account recorded a small surplus during July–March FY26. Fifth, despite significant debt repayments, SBP’s foreign exchange reserves stood at around $15.8 billion as of April 24, 2026, supported by the issuance of Eurobonds as Pakistan re-entered international capital markets after a gap of more than four years. Lastly, a staff-level agreement was reached with the IMF on March 27, 2026.
In light of these developments and evolving risks, the MPC viewed today’s decision as important for achieving price stability over the medium term. The Committee reiterated the importance of continued accumulation of external buffers and maintaining fiscal discipline.
These efforts have contributed to stronger initial economic conditions at the onset of the ongoing geopolitical conflict compared with similar shocks in recent years. The MPC also emphasized the need for structural reforms to make the external account more resilient to the evolving global landscape and to ensure sustainable economic growth.
Real GDP growth was provisionally recorded at 3.9 percent in Q2-FY26, bringing cumulative growth in H1-FY26 to 3.8 percent, reflecting broad-based improvement in economic activity compared with the same period last year.
Large-scale manufacturing performed strongly, growing by 5.9 percent during July–February FY26. High-frequency indicators for industry and services, which had shown strong momentum until February, indicated some moderation in March.
In agriculture, growth prospects have moderated slightly, mainly due to lower-than-expected wheat production, according to initial estimates reported by the Federal Committee on Agriculture. This, along with the anticipated spillover effects of the ongoing Middle East conflict on industrial and services sector activity in Q4, is expected to bring real GDP growth for FY26 closer to the lower bound of the previously projected range.
Moderation in economic activity is likely to continue into FY27, although the outlook remains subject to multiple risks, including the duration and intensity of the ongoing conflict.
Consecutive current account surpluses in February and March resulted in a small cumulative surplus during July–March FY26, largely supported by resilient workers’ remittances.
As a result, the FY26 current account balance is now expected to remain closer to the lower bound of the earlier projected range despite a challenging external environment, including a significant deterioration in terms of trade.
On the financing side, the government proactively secured external financing through enhanced bilateral arrangements and Eurobond issuance, which helped cushion the impact of recent debt and liability repayments on SBP’s foreign exchange reserves.
In this context, SBP’s reserves are now projected to exceed $18 billion by June 2026. Going forward, the Committee emphasized the need to further strengthen foreign exchange buffers amid uncertain global economic conditions.
FBR tax collection remained below target in March, widening the cumulative shortfall to Rs611 billion during July–March FY26. Nonetheless, financing-side data indicates that the fiscal deficit remained contained through March. However, the ongoing Middle East war has made fiscal management more challenging.
The pass-through of higher international oil prices to domestic consumers necessitated targeted subsidies to support vulnerable segments of society.
To achieve the targeted full-year primary surplus, deeper expenditure rationalization may be required. In this regard, the MPC emphasized the need for sustained fiscal reforms, including broadening the tax base and reducing losses of state-owned enterprises, to strengthen fiscal sustainability and resilience.
Broad money growth slowed to 14.5 percent as of April 10, down from 16.0 percent recorded on February 20. This moderation primarily reflects a slowdown in net budgetary borrowing from the banking system.
Meanwhile, private sector credit continued to grow at around 13 percent, consistent with improving economic activity and the lagged effects of earlier policy rate reductions.
During July–March FY26, private sector credit expanded across working capital, fixed investment, and consumer financing. Sectoral lending remained concentrated in textiles, wholesale and retail trade, and chemicals, while the continued rise in consumer financing points to a recovery in household demand. On the liability side, both currency in circulation and deposits have slowed since the previous MPC meeting.
Headline inflation rose to 7.3 percent in March, while core inflation edged up to 7.8 percent. Prior to the Middle East conflict, inflation was already projected to rise toward the upper bound of the target range, mainly due to adverse base effects.
Subsequently, the energy price shock triggered a sharp increase in fuel prices, which has begun to feed into core inflation through higher transport fares. However, contained food inflation amid adequate supplies is expected to offset part of the impact on headline inflation.
Going forward, the MPC assessed that the current supply shock could push inflation into double digits in the coming months before easing thereafter. Nevertheless, inflation is expected to remain above the upper bound of the 5–7 percent target range for most of FY27.
The Committee noted that this outlook remains subject to multiple risks, particularly the duration and intensity of the ongoing conflict, the extent of pass-through from global energy prices to the domestic economy, and potential fiscal slippages.