The State Bank of Pakistan (SBP) decided to maintain its benchmark policy rate at 11.5% during its Monetary Policy Committee meeting on September 14. This decision came despite growing inflationary pressures, with consumer inflation accelerating to 11.1% in August from 9.2% in July, and core inflation also remaining elevated. The central bank acknowledged the rise in inflation and elevated oil prices but chose to keep rates steady, signaling that the existing monetary stance is appropriate for guiding inflation towards its medium-term target of 5%-7%.
Several factors supported the SBP's decision to hold rates. Pakistan's external position has improved, with foreign exchange reserves reaching approximately $18.3 billion in early September and a cumulative current-account surplus of $264 million recorded between March and July. The fiscal position has also strengthened, with a consolidated fiscal deficit of 2.6% of GDP in the last fiscal year and a primary surplus for the third consecutive year. Furthermore, the Federal Board of Revenue slightly exceeded its revenue target for July and August, collecting Rs1.72 trillion.
Market expectations were divided ahead of the decision, though a majority anticipated a hold. A Topline Securities survey showed 84% expected the rate to remain at 11.5%, while 14% predicted a 50-basis-point increase. Analysts from Business Recorder suggested holding the rate while maintaining a hawkish stance, arguing that monetary policy cannot directly address supply-side oil shocks and that policymakers should monitor for second-round effects. Arif Habib Ltd. had a more hawkish view, assigning a 60%-65% probability to a 50-basis-point hike due to the sharply reduced real policy rate cushion (only 40 basis points with the policy rate at 11.5% and inflation at 11.1%).
The central bank's decision reflects a strategy to observe whether higher energy prices translate into sustained domestic inflation. While acknowledging risks from global energy-price swings and input costs, the SBP concluded that holding rates is a prudent approach for now, allowing for further assessment of the external shock's transmission into the domestic economy. However, analysts noted that persistently high oil prices and food inflation could still prompt rate increases in future meetings, possibly in October or December.
