Pakistan Central Bank Adopts a Prudent Stance by Keeping Key Rate at 11.5%
State Bank of Pakistan (SBP) announced the interest rate decision on September 14, and held the rate constant at 11.5% and pointed to escalating volatility driven by the Middle East conflict, which has strained energy supplies and accelerated global inflation. We foresee SBP will hold the key rate unchanged the rest of the year due to inflationary risks.
Bottom Line Up Front (BLUF): State Bank of Pakistan (SBP) announced the interest rate decision on September 14, and held the rate constant at 11.5%. The regulator pointed to escalating volatility driven by the Middle East conflict, which has strained energy supplies and accelerated global inflation. Driven by surging oil prices, August inflation surged to 11.2% from 9.2% y/y and is expected to stay high unless the conflict involving Iran resolves quickly. Thus, we feel the SBP will likely maintain a cautious stance in Q4 2026 and Q1 2027 before resuming its previous easing cycle.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), September 2024 – August 2026
Source: IslamicMacro
Pakistan Central Bank (SBP) announced the interest rate decision on September 14, and held the rate constant at 11.5% in line with the market expectations. The MPC reached a unanimous consensus, with seven of its ten members voting to leave the policy rate unchanged.
According to the written MPC statement circulated on September 14, SBP noted that key rate held stable at 11.5% due to inflationary risks driven by the Middle East conflict, which has strained energy supplies and accelerated global inflation.
The MPC added that recent domestic macroeconomic data turned out broadly in line with the MPC’s expectations as the headline inflation increased by 11.2% y/y in August from the previous 9.2% in July, while core inflation was slightly lower than expectations. “Inflation expectations of both businesses and consumers increased in September, while their confidence weakened,” the statement read.
It appears the SBP maintains a cautious approach guide the inflation towards the 5-7% in the medium term while the target will be very hard to reach as soon as the Iran conflict resumes considering that Pakistan is an energy-dependent country. (Note: We think the regulator could consider increasing the rate further if oil prices will remain over 100-110 USD despite the fact this is not our major in-House scenario).
Given the bank’s medium-term inflation target, we believe the SBP must navigate interest-rate adjustments with caution, adopting a meeting-by-meeting approach due to adverse geopolitical developments, stubborn prices and hikes in energy costs after Iran conflict. We believe the infaltion will gradually ease to 11% y/y in 2026 and 10.3% in 2027 if war in Iran loses steam. We foresee SBP will hold the key rate unchanged the rest of the year due to inflationary risks and the regulator will likely maintain a cautious stance in Q4 2026 and Q1 2027 before resuming its previous easing cycle.
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Analyst / Author Declaration: I, Volkan Sezgin, Independent Analyst and Researcher, declare that the views and conclusions expressed in this publication reflect my professional judgment at the time of publication and are presented in good faith. The analysis has been prepared independently and without improper influence or inducement. Where applicable, material conflicts of interest are disclosed. I observe applicable professional and internal compliance standards concerning confidentiality, independence and the responsible use of information.