Pakistan interest rate hike: SBP raises policy rate to 12%

Pakistan’s central bank raised interest rates for the second time in six months on October 26, 2026, lifting its policy rate by half a percentage point to 12 percent as oil above $100 a barrel and dearer wheat kept inflation near double digits.

The State Bank of Pakistan (SBP) said the new rate takes effect on October 27. Nine of the 10 members of its Monetary Policy Committee (MPC) backed the 50 basis point increase; Dawn and Business Recorder reported that the one dissenter wanted a bigger hike.

It is the first increase since April 27, when the SBP raised rates by a full point to 11.5 percent, its first hike in nearly three years. The committee then held at 11.5 percent in June, on July 27 and on September 14.

Why did the State Bank of Pakistan raise rates?

The short answer is energy and bread.

In its monetary policy statement, the committee said the fighting in the Middle East, with “low prospects of its near-term resolution”, was keeping global energy prices “at persistently elevated levels”. It added that “geopolitical developments have worsened the inflation outlook as compared to the earlier assessment.”

The second reason is closer to home. The statement named “the re-escalation in the Middle East conflict and domestic wheat supply frictions” as “two major factors keeping inflation at elevated levels”, and said both were expected to continue for the next few months.

Headline inflation was 10.3 percent in September, which the SBP said “turned out higher than the MPC’s expectation”. Its target range is 5 to 7 percent. Core inflation, which strips out food and energy, has settled at about 8.4 percent, and the committee warned that pricier food and fuel could seep into it through higher inflation expectations. For how central banks use rates against rising prices, see our explainer on what inflation is and how it is measured.

The committee said the hike was needed “to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock,” and bring inflation back within target. At his press conference, Governor Jameel Ahmad said “the inflation outlook deteriorated significantly because of the ongoing geopolitical crisis,” according to Business Recorder.

The SBP’s rate decisions in 2026

Meeting	Decision	Policy rate after
April 27, 2026	Raised 1 point	11.5%
June 2026	Held	11.5%
July 27, 2026	Held	11.5%
September 14, 2026	Held	11.5%
October 26, 2026	Raised 0.5 point	12%

Source: State Bank of Pakistan; Dawn; Business Recorder; Geo News, October 26, 2026.

The rate had stood at 10.5 percent from October 2025 until the April hike. For scale, it reached a record 22 percent in June 2023 before a long run of cuts.

What changes for KIBOR-linked loans and bank savings?

Most floating-rate lending in Pakistan, including many business loans, car finance and home loans, is priced as a margin over KIBOR, the Karachi Interbank Offered Rate at which banks lend to each other. KIBOR tends to move with the policy rate, and much of this move was already priced in: on October 26, before the hike took effect, the SBP’s data showed three-month KIBOR offered at 12.03 percent and six-month at 12.45 percent. On June 30, both stood at about 11.8 percent.

Borrowers on floating rates usually see the change when their loan next resets, often every three or six months depending on the contract. As a simple illustration, an extra half a point on a 1 million rupee ($3,600) balance adds about 5,000 rupees ($18) of interest a year.

Savers in conventional banks see the other side. The SBP’s interest rate corridor moved up with the policy rate, to a floor of 11 percent and a ceiling of 13 percent, according to the central bank’s website. Under SBP rules, banks must pay individual savers a minimum profit rate set 50 basis points below that floor. That puts the minimum at 10.5 percent, up from 10 percent. Since August 1, 2026, the requirement covers only individuals with an average monthly balance of up to 10 million rupees (about $36,100); companies and larger depositors negotiate their own rates.

Against September’s inflation, the 12 percent rate gives a real (inflation-adjusted) rate of about 1.7 percentage points. The committee said it wants to keep that real rate “adequately positive on forward-looking basis”. Our explainer on how interest rate decisions work covers why that matters.

This article is for information only and is not financial advice.

How did economists and markets react?

The move matched most forecasts. In a Topline Securities poll before the meeting, 61 percent of respondents expected a hike, most of them by 50 basis points, Business Recorder reported. Topline later called the decision “in line with our expectations,” Dawn reported.

Not everyone agreed. The Pakistan Institute of Development Economics (PIDE), a government-funded think tank, had argued for holding rates, saying conditions “do not yet establish a compelling case for an immediate rate increase,” according to Business Recorder.

What else the central bank said about the economy

The statement was less gloomy on growth and the external accounts. SBP reserves were stable at about $21.5 billion, roughly three months of imports, and Pakistan has reached a staff-level agreement with the International Monetary Fund. The committee kept its forecast for growth in the 2026-27 fiscal year (July to June) at 3.5 to 4.5 percent and expects a current account deficit of 0 to 1 percent of GDP. It also said the Federal Board of Revenue beat its tax target for July to September by 33 billion rupees ($119 million).

It flagged risks too: a wider Middle East conflict, swings in commodity prices, changes to energy tariffs, further rises in wheat prices and a strengthening El Niño.

What happens next: The MPC’s next scheduled meeting is on December 14, 2026, according to the SBP’s published calendar. Minutes of the October 26 meeting are due in the week ending November 20. October’s inflation figure, due in early November, will be the first reading since the hike.