The State Bank of Pakistan (SBP)’s Monetary Policy Committee (MPC) on Monday decided to increase the policy rate by 100 basis points to 11.5%, with effect from April 28, 2026, citing . “intensified” risks to the macroeconomic outlook amidst a prolonged Middle East conflict.
In a statement, the central bank noted volatility in global energy prices, freight charges and insurance premiums, as well as disruptions to the supply chain. “While the incoming data has been broadly in line with the MPC’s expectations so far, the impact of these global developments will be visible in key economic indicators going forward,” it said. The MPC assessed that inflation was likely to increase and remain above the target range in the next few quarters, requiring a tighter policy stance to keep inflation expectations anchored and contain second-round effects of the current supply shock to bring inflation within the target range. It stressed this was necessary to preserve macroeconomic stability and achieve sustainable economic growth.
During its meeting, the MPC noted inflation had risen 7.3% in March and core inflation 7.8%, with inflation expectations and confidence of consumers and businesses deteriorating in recent surveys. It said real GDP had grown by 3.8% in H1FY26 against 1.9% in the same period last year and the current account posted a small surplus during July-March FY26. “Despite significant debt repayments, SBP’s FX reserves as on April 24, 2026 are around $15.8 billion, supported by the issuance of Eurobonds, as Pakistan re-entered international capital markets after a gap of over four years,” it said, adding Islamabad had reached a staff-level agreement with the IMF on March 27.
The MPC stressed the combined impact of these developments and evolving risks meant the interest rate was deemed important to achieve the objective of price stability over the medium-term. “The committee reiterated the important role of the continued build-up of external buffers and fiscal discipline. These efforts have contributed to stronger initial economic conditions at the start of the ongoing geopolitical conflict as compared to similar shocks in the recent past,” it added.
The MPC also emphasized the importance of undertaking structural reforms to make the external account more resilient to evolving global landscape and to ensure sustainable economic growth.
According to the SBP’s statement, large-scale manufacturing grew by 5.9% during July-February FY26, while agriculture growth prospects have moderated slightly due to lower-than-anticipated wheat production as per initial estimates. Combined with the impact of the Middle East conflict on industrial and services sector activity in Q4, this was expected to result in real GDP growth for FY26 turning out closer to the lower bound of the earlier projected range.
The central bank warned the moderation in economic activity was likely to continue in FY27.
The MPC credited consecutive surpluses in February and March to resilient workers’ remittances, adding this meant the current account in FY26 was likely remain closer to the lower bound of the earlier projected range, despite challenging external environment including significant worsening of terms-of-trade. “On the financing side, the government has proactively raised external financing via enhanced bilateral arrangements and issuance of Eurobonds, which cushioned the impact of the recent debt and liability repayments on SBP’s FX reserves,” it noted, adding it assessed the reserves to reach more than $18 billion by June 2026.
The central bank noted FBR’s tax collection remained short of target in March, widening the cumulative shortfall to Rs. 611 billion during July–March FY26. “Nonetheless, the financing side data indicates that the fiscal deficit remained contained till March,” it said, while noting the Iran was made fiscal management more challenging. “To achieve the targeted full-year primary surplus, a larger cut in expenditures may be required,” it warned, emphasizing the need for sustained fiscal reforms, including broadening the tax base and curtailing SOE losses, to strengthen fiscal sustainability and resilience.
On inflation, the MPC noted the impact of surging fuel prices amidst the Iran as driving up core inflation via transport fares. However, it noted, contained food inflation amidst ample supplies would likely offset some of the impact on headline inflation. “Nonetheless, going forward, the MPC assessed that the current supply shock may push inflation to double digits in the coming months before it starts to ease subsequently,” it said, warning this was subject to multiple risks, particularly the duration and intensity of the ongoing conflict, extent of pass-through of changes in global energy prices to domestic economy, and potential fiscal slippages.