SBP Policy Rate Hike Expected as Inflation and Rising Oil Prices Increase Pressure
Pakistan’s central bank is widely expected to raise its policy rate by 50 basis points on Monday as rising global inflation, higher oil prices and tighter monetary conditions intensify pressure on the economy. The expected move presents a difficult balancing act for the State Bank of Pakistan (SBP), which must contain inflation and preserve monetary stability without further undermining economic growth. With consumer inflation reaching 10.3% and international energy prices remaining elevated, policymakers face mounting pressure to respond while weighing the impact of higher borrowing costs on businesses, investment and government finances. Previous Monetary Policy Decision Reveals Divided Views The previous monetary policy decision highlighted differing views within the central bank’s policy committee. Seven members voted to maintain the policy rate, while three favoured an increase. Rising international inflationary pressures could strengthen the case for monetary tightening at the upcoming meeting. A 50-basis-point increase is viewed as a potential middle ground, allowing the SBP to address inflation risks without imposing a larger increase in borrowing costs that could further constrain economic activity. Global Inflation and Oil Prices Add to Domestic Pressures Global inflation is becoming increasingly difficult to contain, while major central banks have tightened monetary policy in recent months. Oil prices approaching $117 per barrel, alongside elevated diesel refining margins, are adding to inflation risks and increasing uncertainty for oil-importing economies such as Pakistan. Domestic consumer inflation has also reached 10.3%, raising concerns about persistent price pressures and their implications for household purchasing power. The ongoing Middle East conflict adds another layer of uncertainty, as higher energy costs threaten to push inflation higher and weigh on regional economic activity. Higher Interest Rates Could Weigh on Businesses and Growth Government bond yields have already risen, contributing to tighter financial conditions. A larger-than-expected policy rate increase could push borrowing costs higher for businesses and the government. For companies, more expensive financing could discourage capital expenditure, expansion and new investment. Higher debt-servicing costs could also place additional pressure on public finances. These risks are particularly significant while Pakistan’s economic recovery remains fragile. Policymakers must therefore weigh the benefits of containing inflation against the possibility that aggressive monetary tightening could slow economic activity. Supply-Side Inflation Limits the Impact of Monetary Tightening A key challenge for the SBP is that much of the current inflationary pressure originates from supply-side factors, including rising energy costs. Higher interest rates can help manage demand and inflation expectations, but they cannot directly resolve energy shortages, lower international oil prices or increase agricultural output. This limits the extent to which monetary policy alone can address the current inflationary environment. Managing these pressures will also require improvements in energy availability, supply chains and domestic production. Rupee Stability Faces Export Competitiveness Risks Pakistan has maintained relative currency stability, supported by remittances, rising foreign exchange reserves and subdued imports. However, the real effective exchange rate (REER) has climbed to 108.93, its highest level since 2018. A rising REER can indicate that domestic prices and costs are increasing relative to those of trading partners, potentially weakening export competitiveness. For exporters, the combination of domestic inflation, financing costs and uncertainty over international demand could complicate pricing and order planning. Exporters have been advised to keep forward bookings at three months or less, maintaining earlier guidance amid continued uncertainty. SBP Faces a Delicate Monetary Policy Decision The expected 50-basis-point increase reflects the challenge of responding to inflation without placing excessive pressure on economic activity. A measured adjustment could signal the central bank’s commitment to price stability while limiting the immediate impact on borrowing costs. However, the effectiveness of monetary tightening will depend partly on the duration of elevated global energy prices and the extent to which supply-side pressures persist. For Pakistan, the broader priority remains balancing monetary and external stability with the need to support investment, exports and sustainable economic growth.









