ISLAMABAD: The State Bank of Pakistan has increased its key interest rate to 11.5% in a surprise move to stop prices from rising any further.
The bank’s Monetary Policy Committee raised the rate by 1% (100 basis points) on Monday. Officials said they are taking a tougher stance because of growing uncertainty around the world.
**Why did the bank do this?
The main reason is the ongoing conflict in the Middle East. This war has made oil and shipping more expensive. It has also caused problems in the supply of goods. These issues are expected to push prices higher in Pakistan, so the central bank decided to act early.
What is happening to prices now?
In the latest data, headline inflation rose to 7.3%. Core inflation (which removes food and energy) was even higher at 7.8%. Energy prices jumped 17% compared to last year. There are already signs that higher transport and fuel costs are starting to affect other goods.
The bank now warns that inflation could reach double digits and stay above its 5-7% target range until at least June 2027.
How is the economy doing?
The economy has been growing relatively well. Pakistan’s GDP grew 3.9% in the second quarter of this fiscal year. Large-scale manufacturing also grew nearly 6%. However, the bank expects this growth to slow down in the coming months because of the rate hike.
Good news on reserves
On a positive note, Pakistan’s external position has improved. The country has a current account surplus. The central bank’s foreign currency reserves have risen to $15.8 billion and are expected to cross $18 billion by June 2026. This is due to new money from Eurobonds and an agreement with the IMF.
Who will be hurt or helped?
Financial experts say the rate hike will hit the “cement sector” hard because cement companies have a lot of debt.
On the other hand, “oil and gas exploration companies” will benefit because they have plenty of cash in hand.
Fertilizer and auto companies will see a neutral effect, though car sales may slow down as loans become more expensive for buyers.