The State Bank of Pakistan (SBP) on Monday raised the key policy rate by 50 basis points to 12 per cent, its first increase since April as inflation, fuelled by high energy costs due to the Gulf conflict, remained above target.
In a statement, the Monetary Policy Committee (MPC) said it had decided to increase the policy rate, with a majority decision of nine out of ten members.
It noted that the “intensification in the Middle East conflict and low prospects of its near-term resolution” were keeping global energy prices at persistently elevated levels.
“While the impact of this global shock on the domestic economy has remained contained so far amidst proactive monetary policy adjustment and continued fiscal discipline, geopolitical developments have worsened the inflation outlook as compared to the earlier assessment,” it said.
It went on to say that although the external account and growth outlook remained broadly unchanged, risks had also increased.
“Considering these developments and the evolving risks, the MPC deemed today’s decision as necessary to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock and bring inflation within the target range of 5-7pc. This will help preserve macroeconomic stability, which is necessary for sustainable economic growth,” it said.
It said that forex reserves had remained stable at around $21bn, Pakistan had reached a staff-level agreement with the International Monetary Fund (IMF) and that real gross domestic product (GDP) growth had been revised at 3.7pc, almost unchanged from the initial estimate.
It further said that the Federal Board of Revenue had exceeded its revenue collection target during the first quarter of the current fiscal year, major central banks had raised interest rates in the wake of rising inflationary pressures and the IMF had also revised its global inflation projections upwards.
“While noting these developments and the increasing frequency of global supply shocks, the MPC emphasized the importance of increasing external and fiscal buffers to further strengthen the economy’s resilience. The committee also reiterated that continuing the prudent monetary and fiscal policy mix, alongside timely implementation of structural reforms, is essential for achieving higher and sustainable economic growth,” the statement said.
Regarding inflation, which eased to 10.3pc in September from 11pc in Augus, the MPC said that the re-escalation in the Middle East conflict and domestic wheat supply frictions were two major factors keeping inflation at elevated levels
It said that their expected continuation over the next few months had “worsened the inflation outlook”. It added that there was a risk that elevated food and energy inflation may further increase inflation expectations, which may seep into core inflation going forward.
“In view of these developments and increasing risks to the inflation outlook, the committee assessed today’s decision as important to keep the real policy rate adequately positive on forward-looking basis. This is necessary to bring inflation within the target range over the medium term. The inflation outlook is subject to multiple risks, including geopolitical tensions, global commodity price volatility, unanticipated adjustments in energy tariffs, further uptick in wheat and allied product prices and adverse weather conditions,” it said.
Regarding the external sector, the statement said that exports were recovering, adding that remittances had remained resilient and were projected to turn out higher than the earlier assessment.
It said that the current account deficit in FY27 was assessed to remain within the earlier projected range of 0-1pc of GDP.
“This, along with higher financial inflows, is expected to increase SBP’s FX reserves beyond the current level. This outlook, however, remains susceptible to multiple risks, including elevated global commodity prices, tightening international financial conditions, and supply constraints,” it said.
As per the statement, the committee expected GDP growth to remain within previously projected ranges of 3.5pc to 4.5pc in FY27. However, it added that the outlook was susceptible to risks from escalation in the Middle East conflict and adverse climate events such as El Niño conditions.
SBP governor cites inflationary outlook
SBP Governor Jameel Ahmed also addressed a press conference to announce the decision and said there were many “underlying factors” behind the decision, especially the inflation outlook.
He cited the US-Israel war on Iran and its impact on energy and oil prices, developments in the domestic market and the subsequent impact on inflation.
He said that nine out of ten MPC members voted to raise the policy rate, while one member had a different view; they were of the opinion that it should be raised further.
He said that consumer expectations and other forecasters’ views were taken into consideration, as well as other macro factors, especially the impact of global commodity and oil prices on the external account and the impact of remittances and export trends.
Ahmed noted a deterioration in the current account since the last MPC meeting. However, he added: “The good thing is that its impact is still between zero and one per cent of GDP and it will stay between that.”
He also shared that the central bank revised its outlook on remittances, from $44 billion to $45bn. On exports, the SBP governor said the trend was witnessing an improvement; however, it was not yet in line with the economy’s needs. He added that the bank estimated imports to be close to $71bn.
He said it would take longer than planned for inflation to get within the target range and revised GDP growth to 3.7pc for the current fiscal year ending June 30, 2027.
Meanwhile, Topline Securities said the central bank had raised the policy rate “in line with our expectations”.
Previously, the policy rate was 11.5pc. The central bank had held the rate steady since raising it by 100 basis points in April in response to rising global energy prices and supply chain risks — its first increase in nearly three years.
The SBP has cut the key rate by a cumulative 1,050 basis points since mid-2024, from a record 22pc reached in June 2023, as inflation cooled sharply from multi-decade highs.
Last week, the IMF called for Pakistan’s fiscal policy to go beyond achieving primary balance targets and protecting debt sustainability by reinforcing policy credibility, fostering economic recovery and creating space for public investment and social spending to support stronger long-term growth.
Additional input from Reuters
The post Central bank raises policy rate by 50 basis points to 12pc appeared first on Dawn – Home.
