Central bank raises policy rate by 50 basis points to 12pc

On Monday, the State Bank of Pakistan (SBP) raised the key policy rate by 50 basis points to 12 per cent. Governor Jameel Ahmed explained that the Monetary Policy Committee (MPC) reviewed the situation after their September meeting. Several underlying factors influenced the decision, with a particular focus on the inflation outlook.

The US-Israel war on Iran and its impact on energy and oil prices were cited as key contributors. Nine out of ten MPC members voted for the rate increase, with one member preferring an even higher increase. Ahmed considered consumer expectations and other macro factors, including global commodity and oil prices' impact on the external account and remittances and export trends.

He noted a deterioration in the current account, though the impact remained relatively small at 0-1% of GDP. The central bank also revised its outlook on remittances from $44 billion to $45 billion. Export trends showed improvement, though they were not yet aligned with the economy's needs. Imports were estimated to be close to $71 billion.

Ahmed highlighted that the growth estimate from the previous year was lowered from 2.9% to 2% due to the Middle East situation. The central bank had held the policy rate steady since a 100 basis point increase in April, which was its first hike in nearly three years in response to rising global energy prices and supply chain risks.

The SBP had cut the key rate by a cumulative 1,050 basis points since mid-2024, following a record 22% rate in June 2023 as inflation cooled significantly.