Pakistan holds key policy rate as floods stoke inflation fears

Pakistan’s central bank held its key interest rate steady at 11% on Monday for a third straight meeting, extending a pause in monetary easing as policymakers weighed inflation risks from flood-hit crops against a fragile economic recovery.

The decision underscores policymakers’ concern that flood damage to crops could reignite price pressures and strain growth, even as inflation has cooled and interest rates have already been cut sharply over the past year.

The central bank said in a statement that the economy was on a “significantly stronger footing” to withstand the fallout of the floods compared with past disasters, but warned the damage to crops and supply chains had moderated growth prospects.

It now sees 2026 gross domestic product growth near the lower end of its 3.25%-4.25% forecast range.

Floods have swamped farmlands in Punjab, killing over 950 people and displacing 4.5 million, disrupting supply chains and fuelling food price fears.

“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 State Bank of Pakistan said.

Inflation eased to 3% in August from 4.1% in July, but the SBP projected it could breach its 5-7% target range for most of the second half of the 2026 financial year before reverting to the range in 2027. It noted food price pressures may be partly offset by recent cuts to electricity tariffs.

Thirteen of 14 analysts in a Reuters poll had expected the central bank to keep rates on hold, with one forecasting a 50-basis point cut.

The central bank also flagged fiscal and external vulnerabilities. Floods could drive up government spending and weigh on tax revenue, while crop losses may widen the trade gap, though resilient remittances and improved U.S. market access should help.

Fawad Basir, head of research at KTrade, said the SBP opted for a cautious stance, noting that while a buffer existed for a cut, it was mindful of potential repercussions for the exchange rate.

The SBP projected its foreign reserves will climb to about $15.5 billion by December.

It has cut rates by 1,100 basis points since June 2024, when they stood at a record 22% after inflation peaked near 40% in 2023. It last lowered rates by 100 bps in May and held it steady in June and July. A day earlier, the International Monetary Fund expressed deep condolences on Saturday for the loss of life caused by Pakistan’s devastating floods and said its upcoming Extended Fund Facility review mission will evaluate whether the country’s fiscal policies and emergency provisions can effectively address the crisis, a senior IMF official said.

“The mission will assess whether the FY26 budget, its spending allocations and emergency provisions remain sufficiently agile to address the spending needs necessitated by the floods,” said Mahir Binici, the IMF’s resident representative in Pakistan.

The flash floods have killed 972 people so far, according to Pakistan’s National Disaster Management Authority.

The floods have destroyed crops, livestock and homes across Punjab province and are now pushing into Sindh, threatening fresh food inflation and deeper hardship in the cash-strapped South Asian nation.

Pakistan’s central bank is expected to keep its key rate at 11% on Monday, a Reuters poll

showed, as policymakers weigh inflation risks from crop losses against a slowing economy. An analyst estimated agricultural damage could shave up to 0.2 percentage points off growth this year, with reconstruction-led demand offering only partial offset.  IMF’s board approved a fresh $1.4 billion loan in May to help Pakistan strengthen its economic resilience to climate vulnerabilities and natural disasters.

Earlier, the World Bank will provide Pakistan with a $20 billion loan at a concessional interest rate of just 2% over a 10-year period.

The funding will support six priority sectors, including climate resilience, poverty alleviation, health, education, child stunting reduction and inclusive development. The sources within the Ministry of Finance have made it clear that clean energy, improved air quality and the promotion of private investment have also been identified as key areas of focus.

The concessional loan forms part of a ten-year Country Partnership Framework already finalised between Pakistan and the World Bank. Implementation of the framework is now in its final phase of planning, with a national plan currently under preparation.

An additional $20 billion is expected to be made available to Pakistan’s private sector under the same framework, though at relatively higher interest rates. The total volume of lending under the agreement is projected to reach $40 billion over the next decade.

Agencies