KARACHI, Oct 26 (APP):The State Bank of Pakistan (SBP), on Monday, increased the policy rate by 50 bps to 12 percent owing to the continued geo-political uncertainties in the Middle East and rising energy costs and their potential impacts on domestic economy, inflation outlook and external account.
The SBP Governor, Jameel Ahmad, in a media briefing following the meeting of the Monetary Policy Committee (MPC) here at State Bank Building, informed that the committee, with the majority of nine out of ten members, decided to increase the policy rate to 12 percent, with effect from October 27, 2026.
The governor stated that the re-escalation in the Middle East conflict and recent development as well as the domestic wheat supply frictions are impacting the inflation and other macro factors including current account.
He said that trends of remittance inflows during Q1 FY27 suggest improvement in the overall volume of the fiscal year, which is expected to reach $ 45 billion, he said, adding that exports may reach to $ 33 billion and imports are projected to rise to $ 71 billion.
Considering the positive trends of remittance inflows and exports and simultaneous rise in imports backed by economic recovery, it is assessed that current account deficit may widen further, he said, but it will remain within the range of earlier estimated range of 0 to 1 percent, probably around 0.5%.
The continued improvement in the current account during the previous years has supported the central bank to build up quality forex reserves through market purchase, Jameel Ahmad said and vowed to continue the momentum of building up reserves which are important for stability, better credit ratings and improved debt profile.
On the other hand, the Monetary Policy Committee, in the Monetary Policy statement issued by the central bank, noted that global energy prices are at persistently elevated levels due to intensification in the Middle East conflict and low prospects of its near-term resolution.
“While the impact of this global shock on the domestic economy has remained contained so far amidst proactive monetary policy adjustment and continued fiscal discipline, geopolitical developments have worsened the inflation outlook as compared to the earlier assessment,” it stated, adding that the external account and growth outlook remained broadly unchanged but risks have also increased.
The MPC, while considering the developments and the evolving risks, deemed the rise as necessary to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock, and bring inflation within the target range of 5 to 7%.
The Committee reviewed that SBP’s reserves after reaching the level of 3 months of import cover remained stable at around US$21.5 billion, a staff-level agreement was reached with the IMF, mixed sentiments in recent surveys on inflation expectations of consumers businesses, with weakened confidence indicators for both, revision of real GDP Growth for FY26 at 3.7% by PBS and achievement of Q1-FY27 revenue collection target by FBR, as well as rate hike decisions by major central banks in the wake of rising inflationary pressures and upward revision of IMF global inflation projections.
The MPC also emphasized the importance of increasing external and fiscal buffers to further strengthen the economy’s resilience and reiterated that continuing the prudent monetary and fiscal policy mix, alongside timely implementation of structural reforms, is essential for achieving higher and sustainable economic growth.
In the real sector, economic activity has started to recover gradually as compared to Q4-FY26 as LSM output grew by 1.9% during July-August FY27 against a marginal growth of 0.4% during Q4-FY26, the MPC noted and observed that other high frequency indicators point to recovery, first official estimates of Kharif crops indicated improvement in the agriculture sector outlook, while high frequency indicators for the services sector -such as ICT exports, import volumes, and business confidence of services firms- also indicate gradually improving prospects, supported by positive developments in the commodity-producing sector.
Overall, the MPC expected real GDP growth to remain within the earlier projected range of 3.5 to 4.5% during FY27. However the outlook is susceptible to heightened risks stemming mainly from further intensification in the Middle East conflict, as well as from adverse climate events amidst worsening El Niño conditions, it added.
The Committee observed that the current account balance recorded a deficit of US$874 million in Q1-FY27 with rice, HVA textiles and services led recovery of exports, while workers’ remittances have remained resilient and are projected to turn out higher than the earlier assessment.
On the other hand, imports also rose sharply, led by non-energy imports, in line with the recovery in economic activity and higher prices. The MPC assessed that the current account deficit in FY27 to remain within the earlier projected range of 0 to 1 percent of GDP while SBP’s FX reserves are expected to increase through higher financial inflows.
In the Fiscal sector, during Q1-FY27, 7% growth in FBR tax collection, transfer of substantial SBP profit and contained expenditures will keep overall fiscal and primary balances in surplus, the committee assessed, acknowledging that the intensification in the Middle East conflict has made fiscal management more challenging.
The committee also reviewed the 12.7% y/y growth in Broad money (M2) as of October 9 due to an increase in SBP’s FX reserves and accelerated NFA growth while decline in net budgetary borrowing from the banking system created a space for banks to extend credit to the private sector. The Private sector credit (PSC) grew by 14.1% remaining broad-based across working capital, fixed investment and consumer finance and key borrowing sectors included textiles, wholesale and retail trade, and agriculture.
The Committee noted that elevated prices of energy and wheat and its allied products contributed significantly to the headline inflation of 10.3% in September and core inflation has steadied at an elevated level of around 8.4% while elevated food and energy inflation may increase inflation expectations.
In view of the recent developments and increasing risks to the inflation outlook, the Committee assessed the rate hike as important to keep the real policy rate adequately positive on a forward-looking basis and bring inflation within the target range over the medium term.
Source: APP (Associated Press of Pakistan)
