KEY POINTS
- Central bank cites food inflation risks after crop losses
- Policy rate kept steady for third meeting in a row
- PSX rebounds over 1,100 points after MPC decision
- Businesses divided on flood’s impact on supply chains
ISLAMABAD: The State Bank of Pakistan (SBP) on Monday kept its benchmark policy rate unchanged at 11 percent for the third consecutive meeting, citing inflation risks from flood-induced crop losses while stressing that the economy remains stronger than in past flood episodes.
“The Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 11 per cent in its meeting held on September 15, 2025,” the central bank said in its detailed policy statement.
“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 expectations in FY26.”
The MPC acknowledged that inflation had moderated in July and August and that core inflation continued to decline, but warned that “the near-term macroeconomic outlook has deteriorated slightly in the wake of the ongoing floods.”
Stock market reacts
Ahead of the MPC meeting, the Pakistan Stock Exchange gained 1,138.1 points in early trading to reach 155,577.78. The index fluctuated during the day, dipping to 154,486.21 before surging again after the policy announcement, closing at 155,452.89 at 3:14 pm.
Analysts said the rebound reflected market confidence that the central bank’s cautious approach would help avoid destabilising inflation.
However, some investors had anticipated a further cut to spur economic activity, echoing industry calls for a lower borrowing cost.
Floods and inflation
Floods across key agricultural regions have caused losses worth billions of rupees and disrupted food supplies. The SBP noted that “weekly SPI data has already recorded a substantial increase in prices of perishables and wheat and allied products.”
The MPC further cautioned that “inflation may cross the upper bound of the target range of 5–7 per cent for most of the second half of FY26, before reverting to the target range in FY27.”
At the same time, it assessed that the “economy is on a significantly stronger footing to withstand the negative fallout of the ongoing floods as compared to previous major flood events.”
Business groups told Reuters that delays in interprovincial cargo and crop damage were driving up costs, while others insisted food, fuel and medicine supplies remained stable.
External and fiscal position
Despite the flood shock, the SBP highlighted that foreign exchange reserves had remained stable at around $14.3 billion as of September 5, with projections to reach $15.5bn by December if planned inflows materialise. The current account deficit stood at $254 million in July, expected to remain within 0–1pc of GDP this fiscal year.
The statement added that “the build-up in external and fiscal buffers over the past two years, which was achieved via a coordinated and prudent monetary and fiscal policy mix, will need to continue to make the economy more resilient to shocks and ensure higher growth on a sustainable basis.”
On the fiscal side, the SBP noted that Federal Board of Revenue tax collection grew 14.1 per cent year-on-year in the first two months of FY26, but was slightly short of the target.
Transfers of Rs 2.4 trillion in SBP profits and higher petroleum levies were expected to help the government maintain a primary surplus.
“Going forward, the MPC reiterated the need to continue reforms, preferably through broadening the tax base and reforming loss-making SOEs, to create additional space for social and development spending, and to further build buffers to cushion the impact of future economic shocks,” added the statement
Businesses divided
The business community expressed disappointment over the decision to hold rates. “The economy needs cheaper credit to recover from the flood shock,” a Karachi-based industrialist told Reuters, adding that textile exporters were facing higher financing costs.
However, a survey by the Chartered Financial Analyst Institute revealed that 92% of respondents had expected no change in the policy rate, with many echoing the SBP’s concern that premature easing could stoke inflation.
Finance Minister Muhammad Aurangzeb had also said last month that there may be “room” to lower rates by the end of this year, but stressed the decision rests with the SBP.
