What a policy rate is
A policy rate is the interest rate a central bank sets to steer the cost of short-term money in its economy. Commercial banks borrow and lend to each other overnight close to this rate. The central bank keeps market rates near it with standing facilities and open market operations, which together form an "interest rate corridor".
In Pakistan the State Bank of Pakistan (SBP) sets the policy rate through its Monetary Policy Committee (MPC). The latest decision on record for this page: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
Rate changes are quoted in basis points (bps), small fixed fractions of a percentage point. A move to a higher rate is a "hike" and a move to a lower rate is a "cut".
- The central bank raises its policy rate, or signals that it will.
- Deposits and bonds in that currency start to pay more.
- Investors move money into the currency to earn the higher yield.
- The currency tends to strengthen; a rate cut usually works the other way.
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How the policy rate reaches the economy
The path from a policy rate decision to prices and growth is called monetary policy transmission. It usually runs through these channels:
- Interbank and money market rates. Overnight and short-term rates adjust first, often within the same day.
- Bank lending and deposit rates. Loan rates, savings rates and returns on government securities follow over the following weeks and months.
- Asset prices. Bond yields, equity valuations and property prices respond to the new cost of money.
- The exchange rate. Higher domestic rates can make local-currency assets more attractive to foreign and domestic holders, which can support the currency.
- Expectations. If people believe the central bank will hold inflation down, wage and price setting can adjust before the full effect arrives.
Transmission is slow and uneven. Central banks state that the full effect on inflation takes many months. For background on the inflation side, see Inflation explained and Real interest rates.
Interest rates and currency: the rate differential
In interest rate forex analysis, the level of a single rate matters less than the rate differential: the gap between interest rates in the economies behind a currency pair.
If rates in the base currency's economy are higher than in the quote currency's economy, holding the base currency earns more interest. All else equal, this can attract capital into it. When the gap widens, the higher-yielding currency often gains; when it narrows, it often loses support.
"All else equal" is the weak point. Exchange rates also respond to inflation, the trade and current account balance, risk appetite, capital controls and the exchange rate regime. A high nominal rate paired with high inflation can still mean a low real return. See Bond yields and FX, Balance of payments and Exchange rate regimes.
Carry and the carry trade
Carry is the interest income or cost of holding a position over time. In spot FX and CFDs, carry appears as the overnight swap: a credit or debit applied to positions held past the daily rollover. Its sign and size depend on the rate differential and the provider's own terms. The Swap fees page explains how this works.
A carry trade means holding a higher-yielding currency against a lower-yielding one to earn the differential. The risk is that the exchange rate moves against the position by more than the interest earned. Carry positions tend to unwind sharply during risk-off periods, when holders rush to safe-haven assets at the same time.
Expectations: what money markets price in
Markets react to surprises, not to the decision itself. Before each meeting, traders and banks build an expected path for the policy rate. That expectation shows up in:
- Short-term government bill and bond yields, which move ahead of expected hikes or cuts.
- Interbank and forward rates, including overnight index swaps in large markets, from which analysts calculate the implied probability of a move.
- Surveys of economists published before decisions.
If a hike is fully priced in, the currency may barely move when it is announced, or may even fall if the statement suggests no further hikes. That is why wording matters: see Hawkish vs dovish and Forward guidance.
How markets typically react on decision day
These are common patterns, not rules. Each meeting depends on what was priced in.
| Outcome versus expectations | Typical first reaction in the currency | What to watch next |
|---|---|---|
| Hike larger than expected | Often strengthens | Statement on future moves |
| Hike as expected, hawkish tone | Often steady to firmer | Short-term yields |
| Hike as expected, dovish tone | Can weaken | Revised rate expectations |
| Hold when a move was expected | Moves against the expected direction | Press conference, minutes |
| Cut larger than expected | Often weakens | Inflation outlook |
Price action around decisions can be fast. Spreads often widen and gaps are possible in the minutes after the release. The Economic calendar guide explains how to read release times and consensus figures.
Official calendars and data sources
Central banks publish their meeting schedules in advance on their official websites. Use those official calendars for dates, not third-party summaries, and check that the time zone matches yours.
- SBP: MPC decisions and the Monetary Policy Statement are published on the SBP website. See SBP rates and economy and SBP exchange rates.
- US Federal Reserve: see FOMC meetings and the Fed dot plot.
- Other major banks: ECB, Bank of England, Bank of Japan, and the full list on Central banks and currencies.
Take rate figures only from the central bank's own release or official statistics, and note the effective date, which can differ from the announcement date.
Risks and the legal position in Pakistan
Trading currencies on leverage around rate decisions can lose money fast. A small move against a leveraged position can wipe out the margin, and swap costs add up on positions held for a long time. Read Risk management before trading.
Pakistani residents should also know the official position. On remittances, per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)). On offshore platforms, per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse. More detail is on Law and regulators.
Frequent questions
Do higher interest rates always strengthen a currency?
No. Higher rates can attract capital, but inflation, growth, the current account, risk sentiment and capital controls also matter. If a hike was already priced in, the currency may not rise at all.
What is the difference between the policy rate and market rates?
The policy rate is set by the central bank. Market rates, such as interbank, bill and bond yields, are set by trading and usually stay close to the policy rate at the short end. Further along the curve they reflect expectations of future policy.
What is the SBP's current policy rate?
The latest decision on record for this page: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Always confirm on the SBP's official website, because the rate can change at any MPC meeting.
Why did a currency fall after its central bank raised rates?
Usually because the market expected more, or because the statement signalled that the hiking cycle is ending. Markets trade the gap between the outcome and expectations.
How do interest rates affect overnight swap on a position?
The swap reflects the interest rate differential between the currencies in the pair, plus the provider's own terms. See Swap fees for the mechanics.
Where can I find central bank meeting dates?
On each central bank's official website. Our Economic calendar guide explains how to use a calendar alongside those sources.