Growth to stability

THE State Bank’s decision to raise its key policy rate by 100 basis points to 11.5pc signals a shift in priorities from supporting growth to protecting macroeconomic stability, preserving exchange rate confidence, and preventing inflation from becoming entrenched amid risks arising from the Gulf crisis.

Coming at a time when inflationary pressures are re-emerging and external vulnerabilities intensifying, the move reflects the assessment that risks to stability now outweigh gains from monetary easing. The decision also reveals a growing recognition of the trade-off between growth and stability. Headline inflation rose to 7.3pc in March, while core inflation edged up to 7.8pc, and is expected to stay above the medium-term target range of 5-7pc for much of the next fiscal as higher global oil prices feed into domestic costs.

“Inflation was projected to increase up to the upper bound of the target range even before the onset of the Middle East conflict, mainly due to adverse base effects,” the monetary policy noted. In this context, the SBP governor said the rate hike was a “pre-emptive move” to contain second-round effects before they became entrenched. Policy tightening, therefore, aims to prevent current price pressures from spilling into core inflation, particularly through higher transport and production costs, which can lead to broader price increases.

The Middle East war has drastically complicated our macroeconomic outlook. Elevated energy prices, rising freight charges and higher insurance premiums are putting pressure on an import-dependent economy exposed to external shocks. The SBP has rightly concluded that ignoring these risks could endanger our still fragile economic stability. Its stress on protecting exchange rate confidence is significant, given our history of imported inflation spirals triggered by currency weakness. This is where the growth-versus-stability trade-off is most evident.

Higher borrowing costs will dampen the investment appetite, slow credit expansion and weigh on sectors already sensitive to interest rate movements such as manufacturing and construction. However, allowing inflation expectations to become unanchored would inflict far greater damage on long-term growth prospects. The external account offers some reassurance, but not enough to justify complacency.

Remittances remain the principal anchor of stability, financing both the current account and more than 100pc of the trade imbalance. Foreign exchange reserves have also improved aided by external financing inflows and debt rollovers. Still, these buffers remain vulnerable to prolonged geopolitical shock, particularly if oil prices stay elevated for an extended period.

The bank’s decision serves as a defensive measure aimed at protecting reserves and preventing renewed pressure on the rupee. The future direction of rates will largely depend on the duration of the crisis, with prolonged stress potentially requiring a sustained tighter monetary stance.

Published in Dawn, April 29th, 2026