SBP lifts key rate to 12% on inflation risks

The State Bank of Pakistan has increased its key policy rate by 50 basis points to 12% from 11.5%, tightening monetary policy amid rising inflation risks and global uncertainty. The decision came at the Monetary Policy Committee’s third meeting of fiscal year 2026-27 on Monday, October 26, 2026, and was announced by Governor Jameel Ahmad at a press conference in Karachi. Nine of the ten MPC members voted in favour of the hike, and the move was broadly in line with market expectations.

The increase marks a shift from the previous MPC meeting on September 14, when the central bank kept the benchmark rate at 11.5%. The policy rate had also been held at that level during the previous three meetings, and its rise to 12% signals a more cautious stance toward emerging price pressures and external risks.

Policymakers highlighted a deteriorating inflation outlook as a key reason for the hike. Headline inflation had risen to 11.1% year-on-year in August from 9.2% in July, while global commodity prices and supply-chain disruptions were cited as ongoing risks. The central bank pointed to elevated global oil prices, which have stayed above $100 per barrel, and uncertainty surrounding the Middle East conflict, including the US-Iran confrontation, as important factors behind the decision.

Domestic price dynamics also played a role, with the central bank noting increases in wheat (W1) prices as an additional source of inflationary pressure. While some domestic macroeconomic indicators were described as broadly in line with expectations and core inflation was slightly lower than anticipated, the balance of risks around inflation was viewed as tilted to the upside.

The policy move aligned with expectations from several financial institutions and market participants. A Topline Securities poll showed that 61% anticipated an increase in the policy rate ahead of the October 26 meeting, with 54% expecting a 50-basis-point hike and 7% forecasting a 100-basis-point rise. The poll showed 39% favoured maintaining the rate at its previous level.

Brokerage houses had warned that persistent above-target inflation, oil price volatility linked to conflict in the Middle East, rising inflation expectations and a thin real interest rate supported a measured, pre-emptive rate increase. Some analysts projected that a 50-basis-point hike would raise the ex-post real interest rate to about 2.5% on October 2026 inflation estimates.

The move to 12% is expected to tighten financial conditions across the economy. Commercial borrowing costs are likely to rise as banks adjust lending rates, affecting companies that depend on credit to fund operations, capital expenditure or expansion plans. Higher interest expenses could encourage some firms to delay investments.

Households with floating-rate loans may see higher repayments, while new borrowers could face steeper costs for personal and business loans. Savers could benefit if banks pass on the higher policy rate through improved deposit returns, though the extent of such adjustments will depend on individual institutions. Policymakers are seeking to contain inflation and external vulnerabilities while managing potential headwinds for private-sector activity and economic growth.