THE SBP’s decision to raise its policy rate by 50 basis points to 12pc was largely expected. It is also justified by growing risks to price stability. Although the increase has disappointed many businesses seeking cheaper credit, the monetary policy cannot be determined by their immediate financing needs. With global inflation proving stickier than expected, borrowing costs remaining high internationally, and domestic energy prices vulnerable to fresh external shocks, cutting or holding rates was no option. Pakistan’s recent currency stability, rising reserves and strong remittances have strengthened its external position. Still, these gains do not insulate the economy from the shocks of the Gulf war, or from tighter global financial conditions. Competition for capital is intensifying as major central banks tighten monetary policy, while the IMF expects global inflation to reach 4.7pc.

In this environment, the SBP must guard against entrenched inflation expectations and potential pressure on the rupee. Currency stability, achieved partly through subdued imports, cannot be treated as evidence that external vulnerabilities have disappeared. An abrupt increase in import demand, a rise in energy prices or tighter global financial conditions could quickly expose those weaknesses. The hike is a precaution against losing the gains made so far. Foreign investors have welcomed the hike, viewing it as necessary to contain inflation and safeguard macroeconomic stability amid global energy risks. However, trade bodies argue that inflation is driven by supply constraints, energy costs and fiscal distortions rather than excessive demand. Industry associations have similarly warned that expensive credit could force already struggling factories to cut production or shelve expansion plans. These concerns are legitimate. Industrial recovery remains fragile, and an extended period of expensive financing could weaken investment, employment and exports. But the answer is not to dismiss monetary tightening simply because it imposes costs. Tight money is no cure for supply-side inflationary pressures. But it keeps hard-won stability from slipping by anchoring expectations and protecting the rupee. The real relief for industry must come from lasting tax, power and regulatory reforms.

Published in Dawn, October 28th, 2026