Governor says economic outlook has changed significantly amid rising global commodity prices, geopolitical uncertainty
Islamabad
The State Bank of Pakistan’s Monetary Policy Committee on Monday raised the policy rate by 50 basis points to 12 per cent, effective October 27, with nine of ten members voting in favour.
The decision aims to keep inflation expectations anchored and limit second-round effects from the ongoing supply shock so inflation returns to the 5–7 per cent target range over the medium term.
The Committee cited the intensification of the Middle East conflict and low prospects of near-term resolution, which have kept global energy prices elevated. While the domestic impact has so far remained contained due to earlier monetary adjustments and fiscal discipline, the inflation outlook has worsened relative to the previous assessment. External account and growth projections remain broadly unchanged, but risks have increased.
Since the last meeting, SBP’s foreign exchange reserves stayed stable around $21.5 billion, equivalent to three months of import cover, supported by continued purchases. A staff-level agreement was reached with the IMF. Consumer inflation expectations rose while those of businesses declined, and confidence indicators weakened for both groups. Revised real GDP growth for FY26 was reported at 3.7 per cent, nearly unchanged from the initial estimate.
FBR tax collection in Q1-FY27 grew 7 per cent year-on-year and exceeded the target by Rs33 billion. Major central banks have also raised rates amid higher inflation, and the IMF revised its global inflation projections upward.
Economic activity is recovering gradually. Large-scale manufacturing grew 1.9 per cent year-on-year in July-August FY27, up from 0.4 per cent in Q4-FY26. Cement and petroleum sales, private-sector credit, the Purchasing Managers’ Index, nighttime lights, and nitrogen dioxide emissions all point to improvement. Kharif crop estimates were better than expected, and services indicators, including ICT exports, are gradually strengthening.
The MPC projects real GDP growth of 3.5–4.5 per cent in FY27, subject to risks from further Middle East escalation and adverse climate events linked to El Niño conditions.
The current account recorded a deficit of $874 million in Q1-FY27. Exports of rice, high-value-added textiles and services are recovering, while workers’ remittances remain resilient and are now expected to exceed earlier projections. Imports, particularly non-energy goods, are rising with activity. The full-year current account deficit is still assessed at 0–1 per cent of GDP, with reserves projected to rise further, though subject to commodity price, financing and supply risks.
On the fiscal side, contained expenditures and the transfer of SBP profit are expected to keep the overall and primary balances in surplus for Q1-FY27. Broad money growth accelerated to 12.7 per cent year-on-year as of October 9, driven by reserve accumulation, while private-sector credit expanded 14.1 per cent across working capital, fixed investment and consumer segments.
Headline inflation stood at 10.3 per cent in September, higher than expected, with core inflation steady near 8.4 per cent. Elevated energy and wheat prices remain key drivers. The Committee judged the rate increase necessary to maintain a positive real policy rate on a forward-looking basis.
