SBP holds rate at 11pc for third time

KARACHI: Pakistan’s central bank on Monday held its key interest rate steady at 11 per cent for a third straight policy meeting, as flash floods threaten to deteriorate the inflation outlook.

The State Bank of Pakistan (SBP) adopted a cautious stance, extending a pause in its monetary easing cycle amid concerns that deadly floods could trigger price pressures, particularly food inflation, and hamper economic recovery. According to the National Disaster Management Authority (NDMA), the recent floods have claimed the lives of 972 people and have destroyed crops, livestock and homes across Punjab, with their impact now extending into Sindh.

The SBP has cut rates by 1,100 basis points (bps) since June 2024. Last time, it reduced the rate by 100bps in May 2025 and has kept them steady since then. The SBP said in a statement that the economy is in a significantly stronger position to handle the negative impacts of the floods compared to previous major flood events. However, it cautioned that the evolving macroeconomic outlook and flood-related uncertainty, especially disruption to agriculture and supply chains, have moderated growth prospects. The SBP expects the real GDP growth for the fiscal year 2026 to be near the lower end of the previously projected range of 3.25 per cent to 4.25 per cent.

“This temporary yet significant flood-induced supply shock, particularly to the crop sector, may push up headline inflation and the current account deficit from earlier expectation in FY26,” the SBP said.

Inflation slowed to 3.0 per cent in August from 4.1 per cent in the previous month. However, the central bank’s Monetary Policy Committee (MPC) is concerned about uncertainty related to the near-term inflation outlook. The MPC projects that inflation may exceed the upper limit of the target range of 5-7 percent for most of the second half of FY26 before returning to the target range in FY27. Nevertheless, some of the impact of rising food prices on overall inflation is likely to be mitigated by recent favourable adjustments in electricity tariffs.

“With a still-positive real rate and stable reserves, the MPC sees no need to tighten, yet the temporary spike in food inflation limits scope to cut in the near term. Barring new shocks and once inflation clearly moves back toward the target band, monetary easing is most likely from early 2026, after the flood impact fades,” said Saad Hanif, head of research at Ismail Iqbal Securities Limited.

The SBP said in the statement that the damage to crops from flooding is expected to further widen the trade deficit; however, this may be partially offset by improved market access to the US Additionally, remittances have shown resilience and may increase further, as has been observed during previous natural disasters. The SBP expects the current account deficit to remain within the earlier range of zero to 1.0 per cent of GDP. With the anticipated realisation of planned official inflows, the SBP’s foreign exchange reserves are projected to reach approximately $15.5 billion by December 2025.

Central bank officials told analysts following the interest rate decision that the remittances target of $40 billion has potential for upside; nonetheless, the bank is confident it can achieve this target under the current circumstances.

According to the SBP, of the net repayable amount of $10 billion for FY26, $1.5 billion has already been paid. Regarding the Eurobond repayment of $500 million due by the end of this month, the SBP confirmed that arrangements have been made, ensuring it won’t impact the reserves significantly.The central bank mentioned that its team is well-prepared and has completed its preparations for the upcoming review of the IMF programme, which is scheduled for this month.