ISLAMABAD: The State Bank of Pakistan (SBP) has raised its policy rate by 50 basis points to 12%, effective October 27, 2026, as rising global energy prices and renewed geopolitical tensions have increased the country's inflation risks.

The Monetary Policy Committee (MPC) announced the decision on October 26, with nine of its ten members supporting the increase. The central bank said the intensification of the Middle East conflict and limited prospects for an early resolution were keeping global energy prices elevated.

According to the SBP, the rate increase aims to contain inflationary pressures, keep inflation expectations anchored and bring inflation within its medium-term target range of 5% to 7%.


Pakistan's Inflation Reaches 10.3%

Pakistan's year-on-year headline inflation reached 10.3% in September 2026, exceeding the MPC's expectations. Core inflation remained elevated at approximately 8.4%.

The central bank identified high energy and wheat prices, along with domestic wheat supply disruptions, as major contributors to inflation. It warned that continued increases in food and energy prices could also push up inflation expectations and eventually affect underlying inflation.

For historical data, readers can explore our Pakistan CPI Inflation page, which tracks inflation trends over time.


What Does the Policy Rate Increase Mean?

The policy rate is an important benchmark for Pakistan's financial system. An increase can put upward pressure on borrowing costs, including financing for businesses and households, depending on how banks adjust their lending rates.

Higher interest rates can also encourage saving and help moderate demand, potentially easing inflation over time. However, expensive credit can discourage business investment and consumer spending.

The SBP said the increase was necessary to maintain an adequately positive real policy rate and prevent the current supply shock from generating further inflationary pressures.

Readers can track historical changes through our SBP Policy Rate page.


Foreign Exchange Reserves Remain Around $21.5 Billion

The SBP reported that its foreign exchange reserves remained stable at approximately $21.5 billion, supported by continued foreign exchange purchases. This level represented around three months of import cover.

The central bank also noted that Pakistan had reached a staff-level agreement with the International Monetary Fund (IMF).

However, the external account remains exposed to risks, including elevated global commodity prices, tighter international financial conditions and potential supply constraints.

For historical figures and related indicators, visit our Pakistan Economic Indicators dashboard.


Current Account Records $874 Million Deficit

Pakistan recorded a current account deficit of $874 million during the first quarter of fiscal year 2026–27.

The SBP reported that exports were recovering, supported by rice, high-value-added textiles and services. Workers' remittances remained resilient and were projected to exceed the central bank's earlier expectations.

At the same time, imports increased sharply, led by non-energy imports, reflecting the gradual recovery in economic activity and higher prices.

The MPC expects the current account deficit to remain within its earlier projected range of 0% to 1% of GDP for FY2026–27.


Economic Growth Outlook Remains Unchanged

The central bank expects Pakistan's real GDP growth to remain between 3.5% and 4.5% during FY2026–27.

Large-scale manufacturing output grew by 1.9% year-on-year during July and August, compared with marginal growth of 0.4% during the fourth quarter of FY2025–26.

Other indicators, including cement and petroleum sales, private-sector credit and the Purchasing Managers' Index, also pointed towards a gradual recovery.

Nevertheless, the SBP warned that further escalation of the Middle East conflict and adverse climate conditions could undermine the growth outlook.


Tax Collection Exceeds Target

The Federal Board of Revenue's tax collection grew by 7% year-on-year during the first quarter of FY2026–27, exceeding its target by Rs33 billion.

The MPC noted that the transfer of substantial SBP profits and contained government expenditure had helped keep the overall fiscal and primary balances in surplus during the quarter.

However, the central bank stressed that sustained fiscal discipline, a broader tax base and structural reforms would remain essential for maintaining economic stability.


What Happens Next?

The policy rate increase highlights the challenge facing Pakistan's policymakers: containing inflation while supporting economic recovery.

Although economic activity has begun to improve, rising global energy prices and domestic food supply pressures have complicated the inflation outlook.

The coming months will be important in determining whether tighter monetary policy can bring inflation towards the SBP's 5%–7% target range without significantly weakening economic growth.

Source: State Bank of Pakistan, Monetary Policy Statement dated October 26, 2026.