State Bank Raises Policy Rate to 12% in First Hike Since April as Inflation Pressures Mount

The State Bank of Pakistan (SBP) on Monday raised its key policy rate by 50 basis points to 12 per cent, its first change since April, citing mounting inflationary pressures amid rising global oil prices and uncertainty from the Middle East conflict.

The decision, announced on 26 October, ends a run of holds at 11.5 per cent and lands in line with what most market analysts had expected. April's 100-basis-point rise was its first increase in nearly three years; today's is the second hike this year. It comes on the same day the stock market fell sharply ahead of the announcement.

Main News Report

Dawn reported that the State Bank raised the key policy rate by 50 basis points to 12 per cent on Monday. Addressing a press conference in Karachi, SBP Governor Jameel Ahmed said the Monetary Policy Committee (MPC) had met and reviewed the situation since its last meeting in September.

• New policy rate: 12 per cent, up from 11.5 per cent, with effect from 27 October 2026.
• Size of the move: 50 basis points (0.5 percentage points).
• Vote: nine of the ten MPC members voted for the increase; one member wanted a larger rise, according to the governor.
• Previous move: a 100-basis-point rise in April, the first increase in nearly three years; the rate had been held steady since then.
• Longer path: the rate has been cut by a cumulative 1,050 basis points since mid-2024, from a record 22 per cent in June 2023, as inflation cooled from multi-decade highs.

The governor pointed to the inflation outlook above all. Dawn reported that he cited the US-Israel war on Iran and its impact on energy and oil prices, developments in the domestic market and their subsequent impact on inflation, as well as global commodity and oil prices, the external account, remittances and export trends.

The Express Tribune reported that the governor said crude oil prices hovering around $100 a barrel had increased pressure on domestic prices, and that earlier assessments in July and August suggesting inflation would ease towards 7 per cent by the end of the year had been overtaken by events, with bringing inflation down to that level now expected to take longer. Core inflation had shown improvement, he said, but higher energy prices could generate secondary inflationary effects in the coming months.

Topline Securities said the central bank had raised the policy rate in line with its expectations, Dawn reported.

Background Context

The hike arrives after a week in which markets had already priced in tighter policy. The Express Tribune reported that anxiety over a possible hike dragged the Pakistan Stock Exchange's benchmark KSE-100 index down 714.63 points, or 0.44 per cent, to 161,660.24 by 12:24pm on Monday, after an intraday low of 161,250.06. The index had closed at 162,374.87 in the previous session, after shedding 1,549 points, and selling hit banks, cement, automobiles, energy, refineries and oil marketing companies.

The inflation backdrop is stark. Headline inflation reached 11.1 per cent in August, up from 9.2 per cent in July, before easing to 10.26 per cent in September, according to reporting on the central bank's data, still well above the State Bank's medium-term target range of 5 to 7 per cent. Brent crude hit a six-month high of $116.72 a barrel on Friday, while an LPG cylinder in Pakistan jumped to Rs7,000 after the Iran border closure halted imports.

Expectations ahead of the meeting were split but leaned towards a hike: a Topline Securities poll cited in market coverage found 49 per cent of respondents expecting no change and 49 per cent expecting a rise, with 34 per cent forecasting exactly 50 basis points and 15 per cent forecasting 100 basis points.

Reactions and Statements

Governor Jameel Ahmed said consumer expectations and other forecasters' views were taken into consideration, along with macro factors, especially the impact of global commodity and oil prices on the external account and the impact of remittances and export trends, Dawn reported.

On the external account, The Express Tribune reported that the governor said the current account deficit was still expected to remain between 0 and 1 per cent of gross domestic product, despite pressure from rising commodity and energy prices. He said Pakistan received $10.9 billion in remittances in the first quarter of the current financial year, with full-year remittances now expected at $44 billion to $45 billion, matching Finance Minister Muhammad Aurangzeb's $44 billion remittance target for this fiscal year. Projected exports for the year were put at $32.5 billion to $33 billion, while the import bill was expected at about $71 billion.

Market reaction before the decision was negative: the Tribune's market report noted broad-based selling across banks, cement, automobile assemblers, refineries, oil and gas exploration companies and oil marketing companies, with trading volume of 53.42 million shares worth about Rs3.39 billion by midday.

Why This News Matters

For households, a higher policy rate usually means costlier borrowing, for cars, homes and business loans, and it signals that the central bank sees inflation as the bigger risk right now. That matters when petrol was selling at Rs377.71 a litre and cooking-gas prices have already surged: tighter policy is aimed at stopping higher energy costs from feeding into prices across the board.

For businesses, the move raises financing costs at a time when exporters are already facing higher import bills. The governor's own figures, a $71 billion import bill against $32.5 billion to $33 billion in exports, show why the external balance remains fragile, even with remittances near $44 billion to $45 billion.

For the wider economy, the decision breaks the pattern of holds since April and tests whether tighter policy can anchor inflation expectations without choking off the recovery in growth that the central bank had noted in recent months.

Future Developments

Watch for the State Bank's full monetary policy statement, which will spell out its inflation and growth forecasts and the reasoning of the dissenting member who wanted a larger rise. The next test will be monthly inflation data and whether oil prices ease from their six-month highs, if they do, pressure for further hikes may fade; if they climb further, markets will start pricing in another move.

PakInsight Hub will update this story when the State Bank publishes its full statement and when the market's closing figures for Monday are confirmed.

Sources

• Dawn, Central bank raises policy rate by 50 basis points to 12pc
• The Express Tribune, SBP raises policy rate by 50bps to 12
• The Express Tribune, PSX sheds 715 points as investors brace for policy rate decision

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