Pakistan’s central bank has raised its key interest rate by 100 basis points to 11.50 percent, citing rising inflation risks linked to increasing petroleum prices following tensions in West Asia.

The decision was announced by the State Bank of Pakistan (SBP) after its Monetary Policy Committee (MPC) meeting on Monday. The move marks the first policy rate hike in almost three years, aligning with market expectations that borrowing costs would rise again.

Inflation Concerns Drive Policy Rate Increase

According to the SBP, the primary reason behind the rate hike is growing concern over inflation, particularly due to rising global oil prices triggered by conflict in West Asia.

Pakistan, being heavily dependent on imported fuel, remains vulnerable to external price shocks. The recent escalation linked to tensions involving the Iran, the Israel, and the United States has pushed petroleum prices higher, increasing the likelihood of inflationary pressure in Pakistan’s economy.

The central bank noted that consumer inflation is already showing signs of rising beyond its targeted range.

Inflation Crosses Target Range

Pakistan’s consumer price inflation climbed to 7.3 percent in March, exceeding the SBP’s target range of 5 to 7 percent.

Economic projections suggest inflation could rise further, potentially reaching 10 percent by the end of April, largely driven by higher fuel and import costs.

The latest policy decision aims to control inflationary pressure and stabilise the economy by discouraging excessive borrowing and moderating demand.

Stock Market Reacts Sharply to Announcement

Financial markets reacted negatively following the interest rate hike announcement.

The Pakistan Stock Exchange (PSX) witnessed a sharp decline, with the benchmark KES-100 Index dropping 1,174.69 points to close at 169,497.

Market analysts noted that higher interest rates typically reduce investor confidence in equities, as borrowing becomes more expensive and corporate growth expectations weaken.

Shift After Months of Rate Cuts

The latest hike represents a significant shift in Pakistan’s monetary policy stance.

Previously, the SBP had aggressively reduced interest rates, cutting them by a cumulative 1,150 basis points since June 2024. The policy rate had fallen from a record high of 22 percent to 10.5 percent before the current increase.

This new rate hike signals growing concern among policymakers that inflationary pressures may intensify in the coming months.

What This Means for Pakistan’s Economy

The increase in policy rates is expected to have several immediate economic effects:

• Higher borrowing costs for businesses and consumers
• Slower credit growth across sectors
• Potential cooling of inflation over the medium term
• Reduced investor sentiment in stock markets
• Increased pressure on import-dependent industries

Economists believe that future policy decisions will depend heavily on global oil prices and geopolitical developments in West Asia.