Pakistan hikes rates by 100 bps with eye on above-target inflation

* First hike in almost three years

* Warns inflation could hit double digits in coming months

* Six of 10 analysts in Reuters poll had expected no change

* Conflict keeping oil prices elevated, threatening inflation outlook

By Ariba Shahid

ISLAMABAD, April 27 (Reuters) - Pakistan's central bank raised its key policy rate by 100 basis points to 11.5% on Monday, its first hike in almost three years, warning that inflation could surge to double digits in the coming months as the prolonged Middle East conflict drives up energy costs in the import-dependent nation.

The State Bank of Pakistan's Monetary Policy Committee surprised most forecasters - six of 10 analysts in a Reuters poll had expected rates to remain on hold at 10.5%.

The central bank said inflation, which quickened to 7.3% in March, was likely to remain above its 5-7% target range for most of the next fiscal year, as fuel price increases seep into core inflation through higher transport costs.

A ceasefire in the Iran-U.S. war has so far failed to produce a lasting peace deal, keeping oil prices elevated.

"Sense has prevailed," said Fawad Basir, head of research at KTrade. "The precautionary and prudent stance adopted by the central bank was essential to combat short-run shocks."

Basir added he did not see the move as a shift in trend or the start of a rate-hike cycle, calling it a precautionary measure "till things smoothen out on the geopolitical front."

The central bank said real GDP grew 3.8% in the first half of fiscal year 2026, more than double the 1.9% recorded a year earlier, but warned full-year growth would come in "closer to the lower bound" of its forecast range, with moderation expected to continue into FY27.

Pakistan's foreign exchange reserves stood at $15.8 billion as of April 24 and were projected to rise above $18 billion by end-June, the SBP said, after Eurobond issuance marked the country's return to international capital markets for the first time in more than four years.

The SBP has cut rates by a cumulative 1,150 basis points since June 2024, from a record high of 22%.

Pakistan is on a $7 billion IMF programme and reached a staff-level agreement with the fund in March, which had previously cautioned against premature easing and urged the bank to maintain a positive real interest rate. (Reporting by Ariba Shahid; Editing by Saad Sayeed and Toby Chopra)