SBP Holds Policy Rate at 11% Amid Flood-Linked Inflation Risks
Central bank sees economy more resilient than past floods but warns inflation outlook has deteriorated.
The State Bank of Pakistan (SBP) on Monday kept its policy rate unchanged at 11 percent, in line with market expectations, while flagging elevated inflationary pressures stemming from ongoing floods. The decision was taken during the Monetary Policy Committee (MPC) meeting held on September 15, 2025, where the central bank emphasized that maintaining current rates was necessary to ensure price stability.Agriculture losses may push inflation higher
According to the MPC’s statement, Pakistan’s near-term macroeconomic outlook has deteriorated modestly in the wake of recent flooding. However, the SBP stressed that the intensity of the disaster is lower than previous flood events, and that the economy is in a comparatively stronger position to recover. The central bank projected that agricultural output, particularly crop yields, would likely rebound after the floods, helping to normalize supply and reverse food price spikes in the months ahead.
Food inflation, which typically rises after natural disasters, remains the most pressing concern. The SBP noted that prices of perishable goods have already registered an upward push due to flood-related disruptions, but highlighted that post-flood harvests generally improve supply and help reduce inflationary pressures. Despite this, the bank expects inflation in the second half of fiscal year 2026 to remain above its medium-term target range of 5 to 7 percent, before converging back toward that range in fiscal year 2027. The average inflation for FY26, however, is projected to remain within the 5–7 percent range, consistent with earlier forecasts.
On the external front, the SBP maintained its forecast for the current account deficit at 0 to 1 percent of GDP, suggesting stability in external balances despite climate-related shocks. The central bank also expressed confidence in meeting its ambitious $40 billion remittance target for the fiscal year, citing upside potential in overseas inflows.
Addressing external debt obligations, the SBP reported that of the $10 billion in net repayments due in FY26, $1.5 billion has already been settled. The bank added that arrangements are in place to meet a forthcoming $500 million Eurobond repayment by the end of September, ensuring that foreign exchange reserves will not be adversely affected.
On growth, the SBP revised its expectations to the lower end of the previously projected 3.25 to 4.25 percent band. The central bank attributed the moderation in growth to crop losses caused by floods, though it maintained that the broader economy remains on firmer footing than in past crises.
The SBP also reassured markets that it has made thorough preparations for the upcoming International Monetary Fund (IMF) review, underscoring its commitment to meeting program benchmarks and maintaining credibility with global lenders. The IMF has previously emphasized the need for Pakistan to control inflation, strengthen foreign reserves, and maintain fiscal discipline as conditions for continued financial support.
Analysts observed that the MPC’s decision to hold the rate steady reflects a balancing act between addressing food-driven inflation and avoiding further dampening of growth, which is already under pressure due to climate shocks. The unchanged rate also signals the central bank’s preference to monitor evolving conditions before shifting its monetary stance.
Pakistan’s economy has long grappled with structural weaknesses exacerbated by recurring floods, which disrupt agricultural output and strain fiscal resources. The SBP’s latest statement reflects cautious optimism that resilience built in recent years, particularly in external account management, will allow the country to weather the impact of the latest disaster without major destabilization.
As the central bank monitors post-flood developments, it has reiterated its focus on price stability, financial discipline, and external sector management. With inflation risks still tilted to the upside, the SBP has left the door open for future adjustments, but for now, its stance reflects confidence that the economy can absorb shocks while maintaining stability.
The SBP concluded that a measured policy approach is best suited for the current environment, reiterating that sustaining resilience against climate-driven disruptions is key to protecting growth, stabilizing inflation, and safeguarding Pakistan’s economic recovery.
