Pakistan raises key rate to 12% as Gulf conflict stokes inflation risks

Pakistan's central bank raised its key ​interest rate by 50 basis points ‌to ​12% on Monday, its first increase since April as inflation, fuelled by high energy costs due to the Gulf conflict, remained above target. The move marks ‌the State Bank of Pakistan's second increase this year, following a 100-basis-points hike in April as the Middle East conflict pushed energy costs higher and threatened to spread price pressures across the economy.

It also ended the bank's ‌pause on the key rate after three straight holds since June. "The Monetary Policy Committee (MPC) ... noted that ‌the intensification in the Middle East conflict, and low prospects of its near-term resolution, are keeping global energy prices at persistently elevated levels," the panel said in a statement.

It said geopolitical developments had worsened the inflation outlook and risks had increased although the ⁠external ​account and growth outlook remained ⁠broadly unchanged. "Considering these developments and the evolving risks, the MPC deemed today’s decision as necessary to keep inflation expectations anchored, contain second-round ⁠effects of the ongoing supply shock, and bring inflation within the target range of 5–7%," it said.

"This will help preserve ​macroeconomic stability, which is necessary for sustainable economic growth." SBP Governor Jameel Ahmad said it would ⁠take longer than planned for inflation to get within the target range and revised GDP growth to 3.7% for the current fiscal ⁠year ​ending June 30, 2027.

Annual inflation eased to 10.3% in September from 11.1% in August, but still above the central bank's medium-term target range of 5-7%. Higher borrowing costs constrain Pakistan's economic recovery as it faces the ⁠impact of elevated energy prices on its import bill and domestic costs.

The IMF urged Pakistan this month ⁠to maintain sufficiently tight monetary ⁠policy to return inflation durably to target. Pakistan reached a staff-level agreement with the IMF on October 7 that could unlock about $1.21 billion under its economic reform ‌and climate resilience ‌programmes, subject to executive board approval.