KARACHI: The State Bank of Pakistan (SBP) on Monday raised its policy interest rate by 50 basis points to 12 per cent amid rising inflationary pressures fuelled by the intensifying Middle East conflict and persistently high global energy prices, a move that was in linewithmarketexpectationsbut leaves little room for the economy to grow beyond the sustainable rate of 3.7 per cent.

Speaking at a press conference, SBP Governor Jameel Ahmad said the decision was taken by a majority of nine out of 10 members of the Monetary Policy Committee (MPC) andwould take effect from Oct 27.

On April 27, the SBP had increased the policy rate by 100 basis points, from 10.50pc to 11.50pc.The MPC justified its decision by saying that the intensification of the conflict in the Middle East and the low prospects of its nearterm resolution were keeping global energy prices persistently elevated.

`The inflation outlook is subject to multiple risks, including geopolitical tensions, global commoditypricevolatility,unanticipated adjustments in energy tariffs, further uptick in wheat and allied product prices, and adverse weather conditions,` the SBP governor said.

According to the SBP, the latest sentiment surveys showed that consumers` inflation expectations had increased, while those of businesses had declined. Meanwhile, confidence indicators for both had weakened.

The MPC noted that the re-escalation of the Middle East conflict and domestic wheat supply frictions were the two major factors keeping inflation elevated. Their expected continuation over the next few months had worsened the inflation outlook.

It said core inflation had stabilised at an elevated level of around 8.4pc.

`However, there is a risk that elevated food and energy inflation may further increase inflation expectations, which may seep into core inflation going forward,` the SBP said, adding that it still expects to bring inflation within the target range of 5-7pc in FY27.

The SBP said geopolitical developments had worsened the inflation outlook compared with its earlier assessment, while the external account and growth outlook remained broadly unchanged, although risks had also increased.

Higher interest rates mean costlier borrowing, with Pakistan`s rates among the highest in the region, which is likely to hurt investment and economic growth. Over the past four years, the government has beenunable to increase investment and growth, contributing to severe poverty and joblessness in the country.

Trade and industry had been hoping for a reduction in interest rates to boost economic activity.

The SBP cited the Pakistan Bureau of Statistics (PBS), which reported revised real GDP growth of 3.7pc for FY26, almost unchanged from the initial estimate.

However, the centralbank expects real GDP growth to remain within its earlier projected range of 3.5-4.5pc in FY27. `This outlook is susceptible to heightened risks stemming mainly from further intensification in the Middle East conflict, as well as from adverse climate events amidst worsening El Niño conditions,` SBP said.

Real sector Economic activity has started to recover gradually compared with the fourth quarter of FY26, in line with expectations. Large-scale manufacturing (LSM) output grew by 1.9pc year-on-year in July-August FY27, against marginal growth of 0.4pc in the fourth quarter of FY26, SBP said.

Similarly, other high-frequency indicators, including cement and petroleum, oil and lubricants (POL) sales, private-sector credit and the Purchasing Managers` Index, also pointed to a recovery in economic activity, it added.

External sector The current account recorded a deficit of $874 million in the first quarter of FY27. Exports were recovering, led by rice, high-value-added (HVA) textiles and services exports,whileworkers`remittancesremained resilient and were projected to be higher than previously assessed, the SBP said. It assessed that the current account deficit in FY27 would remain within its earlier projected range of 0-1pc of GDP.

However, this outlook remained vulnerable to multiple risks, including elevated global commodity prices, tighter international financial conditions and supply constraints.

Fiscal sector During the first quarter of FY27, Federal Board of Revenue (FBR) tax collection grew by 7pc year-on-year, exceeding the target by Rs33 billion.

With the transfer of substantial SBP profits and contained expenditures, the overall fiscal and primary balances were assessed to remain in surplus during the quarter.

`However, the intensification in the Middle East conflict has made fiscal management more challenging, the SBP said.

Inflation Elevated energy rates and the rising prices of wheat and allied products contributed significantly to headline inflation, which reached 10.3pc year-on-year in September, higher than the MPC had expected.

In view of these developments and the increasing risks to the inflation outlook, the committee considered the latest rate decision important to keep the real policy rate adequately positive on a forward-looking basis.

This was necessary to bring inflation within the target range over the medium term.