The State Bank of Pakistan raised its benchmark policy rate by 50 basis points to 12% on Oct. 26, its second increase this year, saying the Middle East conflict and higher wheat prices had made the inflation outlook worse than it expected only weeks earlier. The new rate took effect the next day.

For investors in Asia, the decision adds Pakistan to a growing list of oil-importing economies tightening again after a year of cuts. It also tests a recovery that has lifted the country's reserves and drawn a fresh staff-level agreement with the International Monetary Fund. Pakistani borrowers now pay 1.5 percentage points more than at the December 2025 low of 10.5%, according to a rate timeline published by the Pakistan Observer.

Nine of the 10 members of the Monetary Policy Committee voted for the move, the bank said in its statement. ARY News reported that the remaining member wanted a larger increase. A Bloomberg forecast cited by Mettis Global on Oct. 23 had pointed to a half-point rise, so the size of the move matched expectations.

Why the State Bank of Pakistan Tightened Again

The committee said persistently high global energy prices, together with a low chance that the Middle East conflict ends soon, were the main pressure. Headline consumer inflation was 10.3% from a year earlier in September, above the committee's own projection and well outside the 5% to 7% medium-term target. Core inflation, which strips out food and energy, has settled around 8.4%.

Energy and wheat, along with products made from wheat, accounted for much of the September reading, the statement said. Governor Jameel Ahmad told reporters after the meeting that conditions had deteriorated since the committee's September meeting, according to Geo News, and that wheat prices had climbed. He said, “Geopolitical factors contributed to inflation,” ARY News reported.

The bank's concern is second-round effects. Consumer inflation expectations rose in the latest sentiment survey, though business expectations eased, and the committee warned that costly food and fuel could push core prices higher. It said the hike was meant to keep the real policy rate adequately positive on a forward-looking basis. Mettis Global, citing Bloomberg, noted that inflation had been in double digits in five of the six months through August, when it reached 11.1%.

This is the second leg of a tightening cycle that began on April 27, when the bank lifted the rate by a full percentage point to 11.5% in its first increase in almost three years, Dawn reported at the time. Inflation was 7.3% in March. Between June 2024 and December 2025, the bank had cut its rate by a cumulative 1,150 basis points from a record 22%, according to the Pakistan Observer.

Reserves, Growth and the External Account

The external picture is stronger than in past oil shocks. The central bank's foreign exchange reserves held at about $21.5 billion, roughly three months of import cover, helped by continued purchases of dollars in the interbank market. In late April, reserves were about $15.8 billion, according to Dawn.

The current account ran a deficit of $874 million in the July-September quarter, the first of fiscal 2027. Exports of rice, higher-value textiles and services are recovering and remittances have held up, the committee said, but imports are rising quickly as activity picks up. It still expects the full-year deficit to stay within 0% to 1% of gross domestic product and reserves to rise from current levels on stronger financial inflows. The bank's projections include exports of $32.5 billion, imports of $71 billion and workers' remittances of $45 billion, Geo News reported.

Growth is picking up from a weak spring. Large-scale manufacturing output rose 1.9% from a year earlier in July and August, after growth of just 0.4% in the April-June quarter. Private-sector credit grew 14.1%, led by textiles, trade and agriculture. The committee kept its forecast for real GDP growth in fiscal 2027 at 3.5% to 4.5%, after revised growth of 3.7% in fiscal 2026, but said a worsening El Nino and further escalation in the Middle East were risks.

On the fiscal side, the Federal Board of Revenue's tax collection rose 7% in the first quarter and beat its target by 33 billion rupees. The committee said the conflict had made fiscal management harder and called for a broader tax base and faster structural reform.

How Pakistan Fits Asia's Tightening Turn

Pakistan's move follows a wider shift among the region's central banks as energy costs feed into prices, a trend Capital Times tracked in its scorecard of Asia's tightening cycle. The committee's statement also pointed to rate increases by major central banks and an upward revision to the IMF's global inflation projections.

Two days after the decision, Ahmad told a graduation ceremony for ICMA Pakistan in Lahore that inflation had risen since fiscal 2026 but was projected to ease gradually toward the target range with the help of tighter policy. He reminded the audience that the bank had raised its rate to 22% during the crisis of fiscal 2022 and 2023 and kept it there for almost a year, until it was confident inflation was on a sustained downward path.

The committee listed the risks to its inflation path: energy tariff changes, more increases in wheat prices, swings in global commodities and bad weather. The next reading investors will weigh is October consumer inflation, the first full month of data since the committee judged September's 10.3% too high.