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• Central bank says Gulf conflict has intensified macroeconomic risks; governor calls it ‘pre-emptive move’
• SBP sees inflation staying above upper bound of 5-7pc
• Remittance target for FY26 slips by $1bn
KARACHI: The State Bank of Pakistan (SBP) has increased the interest rate by 100 basis points to 11.5 per cent, mainly in the wake of intensified risks due to the prolonged Middle East conflict.
“The Monetary Policy Committee [MPC], in its meeting [on] Monday, decided to increase the policy rate by 100 bps to 11.50pc with effect from April 28, 2026,” the SBP said in a statement.
It added that the committee noted that the prolongation of the Middle East conflict had intensified risks to the macroeconomic outlook.
The SBP said that headline inflation rose to 7.3pc in March, while core inflation also inched up to 7.8pc.
“Inflation was projected to increase up to the upper bound of the target range before the start of the Middle East conflict, mainly due to adverse base effects,” it added. However, inflation is expected to stay above the upper bound of the target range of 5-7pc for most of FY27, the SBP said.
Against the backdrop of global changes, the committee assessed that inflation was likely to increase and remain above the target range in the next few quarters.
‘Pre-emptive step’
During the post-meeting analyst briefing session, SBP Governor Jameel Ahmed said the recent rate hike was a pre-emptive move.
“While the current inflation spike is largely being driven by external energy prices and geopolitical developments, the central bank’s primary concern is the emergence of second-round effects, including pass-through into core inflation, broader price adjustments, and the risk of inflation expectations becoming unanchored,” he added. “The tightening is therefore aimed at containing these risks early.”
On the interest rate outlook, the SBP refrained from giving explicit forward guidance, maintaining its data-dependent stance.
External pressures
However, it highlighted that the current decision already incorporated expected pressures from the Middle East conflict, including higher oil prices, increased shipping and insurance costs, and their impact on inflation and the external account. The future direction of rates will largel depend on the duration and intensity of the conflict, with prolonged stress potentially requiring a sustained tight stance.
The SBP reiterated confidence in achieving its foreign exchange reserves target of $18 billion by June.
“Of the total $25.4bn in debt obligations for FY26, $21.2bn has already been settled or rolled over, leaving $4.2bn outstanding. [Of this amount] $2.7bn is expected to be rolled over, bringing the net repayable amount for the remainder of the fiscal year [April-June] to $1.5bn,” Mr Ahmed said.
Regarding remittances, the SBP indicated that while risks from the UAE and the broader Middle East situation were being closely monitored, the overall outlook remained resilient. FY26 remittances are now expected at $41bn, only marginally lower than the pre-crisis estimate of $42bn.
A research report by Arif Habib Limited stated: “The central bank acknowledged a clear growth versus stability trade-off, noting that economic activity had been gaining momentum prior to the shock, with improving industrial output and GDP growth. However, given rising external risks, the SBP has shifted its focus towards safeguarding macroeconomic stability, exchange rate confidence, and the inflation trajectory.”
Economic activity
The MPC said that real GDP growth was provisionally recorded at 3.9pc in Q2-FY26, bringing cumulative growth in H1-FY26 to 3.8pc, reflecting a broad-based improvement in economic activity compared with the same period last year.
Large-scale manufacturing posted a robust performance, growing by 5.9pc during July-Feb FY26. High-frequency industrial and services sector indicators, which had been reflecting strong momentum in economic activity until February, showed some signs of moderation in March, it said.
However, the ongoing Middle East conflict has made fiscal management more challenging. The pass-through of higher international oil prices to domestic consumers has necessitated support for vulnerable groups through targeted subsidies. To achieve the targeted full-year primary surplus, a larger cut in expenditures may be required.
The SBP said credit to the private sector continued to grow at around 13pc, in line with improving economic activity and the lagged impact of earlier policy rate cuts. However, it added that broad-based import restrictions might not be feasible, and policy must remain aligned with global practices and agreed reform frameworks.
Published in Dawn, April 28th, 2026
