The State Bank of Pakistan (SBP) may raise its policy rate by 50 basis points to 12 percent at its monetary policy meeting on Monday, October 26, as persistent inflation and improving economic activity strengthen the case for tighter monetary policy.
Bloomberg reported that the central bank could increase borrowing costs after keeping the rate unchanged since April. The SBP last held its policy rate at 11.5 percent, but rising inflation expectations and higher energy costs have added pressure for a change in direction.
Inflation has remained in double digits in five of the past six months, well above the central bank’s target range of 5 percent to 7 percent. The latest available figures showed headline inflation rising to 11.1 percent year on year in August, up from 9.2 percent in July. Core inflation, which excludes more volatile items, stood at 8.7 percent.
Higher electricity and gas costs, along with swings in global commodity prices, have kept inflationary pressures alive. Consumer and business expectations for future inflation have also increased, raising concerns that price pressures could become harder to contain.
A rate increase would help the central bank curb demand and prevent inflation from becoming more entrenched. Medium-term inflation expectations are particularly important because they can influence wage demands and the prices businesses charge.
There are, however, reasons for the SBP to hold rates steady. A broadly stable rupee and stronger foreign exchange buffers give the central bank some room to wait and assess how inflation develops.
But the case for keeping monetary policy tight has also weakened in another respect. The real interest rate, measured against inflation, is below its historical average of about 2.5 percent, suggesting that the current policy stance is less restrictive than it has been in the past.
Economic activity is also showing signs of recovery. The economy grew 2.8 percent year on year in the third quarter of 2026, following a 0.6 percent contraction in the second quarter. This rebound suggests that the economy may be better placed to absorb higher borrowing costs.
At its previous meeting, the SBP’s Monetary Policy Committee (MPC) warned that the escalating conflict in the Middle East had pushed global commodity prices higher and prolonged supply chain disruptions. It also said uncertainty surrounding the economic outlook had increased.
The committee expected inflation to ease gradually towards the upper end of its target range by June 2027. However, it cautioned that the risks to this forecast had risen significantly.
These risks include volatile international commodity prices, further electricity and gas tariff adjustments, supply disruptions and food price fluctuations linked to worsening El Niño conditions.
The upcoming decision will require the SBP to balance the need to bring inflation under control against the risk that higher interest rates could slow the economic recovery. A 50-basis-point increase would signal that the central bank remains focused on containing price pressures, even as economic activity picks up.
The rate decision is due on Monday, October 26.
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