Pakistan’s central bank raises its key interest rate by 50 basis points to 12 percent, its first increase since April, as inflation stays above target amid high energy costs linked to the Gulf conflict.
The State Bank of Pakistan (SBP) announced the decision on Monday. It is the bank’s second hike this year, after a 100-basis-point rise in April, and it ends a pause of three straight holds since June.
The bank’s Monetary Policy Committee (MPC) said the intensifying Middle East conflict and slim prospects of a near-term resolution are keeping global energy prices persistently high.
MPC added that geopolitical developments have worsened the inflation outlook and raised risks, while the outlook for the external account and growth remains broadly unchanged.
“The MPC deemed today’s decision as necessary to keep inflation expectations anchored, contain second-round effects of the ongoing supply shock, and bring inflation within the target range of 5-7 percent,” the committee says in a statement.
Energy shock slows return to target
SBP Governor Jameel Ahmad says inflation will take longer than planned to return to the target range. He revises GDP growth to 3.7 percent for the fiscal year ending on 30 June 2027.
Annual inflation eased to 10.3 percent in September from 11.1 percent in August, but it remains above the bank’s medium-term target range.
The Iranian blockade of the Strait of Hormuz following US-Israel war on Iran and Houthi attacks on Saudi oil facilities have worsened the energy outlook, hitting developing economies such as Pakistan hard.
Higher borrowing costs constrain Pakistan’s economic recovery as elevated energy prices raise its import bill and domestic costs.
The International Monetary Fund (IMF) urged Pakistan this month to keep monetary policy tight enough to return inflation durably to target.
Pakistan reached a staff-level agreement with the IMF on October 7 that could unlock about $1.21 billion under its economic reform and climate resilience programmes, subject to executive board approval.
