State Bank raises policy rate to 12pc on Middle East oil shock

The State Bank of Pakistan raised its policy rate by 50 basis points to 12 per cent on Monday, citing an increase in energy prices caused by the conflict in the Middle East and the pressure it is putting on inflation and on the country's external accounts.

Speaking after the Monetary Policy Committee's decision, State Bank Governor Jameel Ahmed said nine of the committee's 10 members supported the increase, which took the rate up from 11.5 per cent. He said the war in the Middle East has driven crude oil in international markets past $100 a barrel, and that the effect is showing up in inflation.

Ahmed said inflation stood at 7.1 per cent last year, while core inflation has improved over the past two months. He said the rate rise was made keeping in view the present economic situation and concerns about prices. Higher oil prices, he added, have also left their mark on the country's external accounts.

The policy rate is the benchmark the central bank sets for commercial lending, and the increase raises the cost of borrowing across the economy.

Ahead of the announcement, Aaj News reported that Pakistan had absorbed the oil price shock better than expected, but that political resistance to any depreciation of the rupee was narrowing the central bank's room to keep rates unchanged. The outlet also reported that at the previous Monetary Policy Committee meeting, three of the 10 members voted for a 100 basis point increase while the remaining seven favoured holding the rate.

The decision comes as global financial conditions tighten. The lead report by Aaj News attributed the rate rise directly to the energy price increase stemming from the Middle East escalation, and quoted the governor linking the same war to both the inflation outlook and the strain on the external accounts.

No further measures were announced alongside the rate decision.