Pakistan Raises Benchmark Interest Rate to 12% as Energy Costs Pressure Inflation

Pakistan's central bank has raised its benchmark policy interest rate by 0.5 percentage point to 12%, responding to renewed inflation risks from higher energy prices and domestic food costs.

The State Bank of Pakistan announced the decision on October 26, with the new rate taking effect on October 27. Nine of the ten members of its Monetary Policy Committee voted for the increase. The previous policy rate was 11.5%.

The committee said the outlook for inflation had worsened as the Middle East conflict kept international energy prices elevated and supply disruptions persisted. Domestic wheat and related food prices have also contributed to inflation pressure. Higher borrowing costs are intended to reduce demand-driven price increases and prevent temporary supply shocks from feeding into broader inflation expectations.

Pakistan's headline consumer inflation was 10.3% year on year in September, according to the monetary policy statement, above the central bank's medium-term target range of 5% to 7%. Core inflation, which excludes some volatile components, remained elevated at around 8.4%.

The bank did not substantially change its forecast for real economic growth in fiscal 2026–27, keeping the expected range at 3.5% to 4.5%. It said large-scale manufacturing and other indicators pointed to a gradual recovery, while risks from international fuel costs and adverse weather remained.

The central bank reported foreign-exchange reserves of approximately $21.5 billion and a first-quarter current-account deficit of $874 million. It expects the current-account deficit for the fiscal year to remain between zero and 1% of gross domestic product, subject to international price and financing conditions.

A higher policy rate can increase financing costs for businesses and households, even as it aims to contain inflation. The committee called for continued fiscal discipline and structural reforms alongside monetary tightening.

The decision is a completed interest-rate change, not a forecast of further increases. Future decisions will depend on incoming inflation, economic activity and external-account data.