Pakistan’s monetary policy is likely to remain tight as rising inflation and uncertain oil prices make it difficult for the State Bank of Pakistan (SBP) to reduce interest rates in the near term. Financial experts and analysts expect the central bank to focus on containing inflation and maintaining economic stability rather than using lower borrowing costs to stimulate economic activity. The outlook comes after consumer price index-based inflation reached 10.3 per cent in September, putting further pressure on businesses, industries and households. With inflation remaining well above the government’s desired range, analysts believe the SBP is unlikely to achieve its FY27 medium-term inflation target of 5 to 7 per cent under the current economic conditions.
The increase in consumer prices is being linked in part to cost-push pressures, with uncertain international oil prices remaining a major concern for Pakistan. Higher energy and fuel costs can feed into production expenses, transportation costs and consumer prices, placing additional pressure on businesses that are already dealing with elevated operating costs. Industry representatives have also warned that sustained double-digit inflation is affecting investment decisions and weakening economic activity. Textile manufacturer and exporter Amir Aziz said that domestic and foreign investment remained limited while existing industries were struggling, arguing that a broader economic policy was needed to encourage domestic investment and address high energy prices and inflation.
Energy costs have also become an important factor in Pakistan’s competitiveness compared with regional markets. Mohammad Hasham, who spent 25 years working with major textile units in Bangladesh, highlighted the difference in electricity costs between the two countries. He said energy costs in Bangladesh are around 7 to 8 cents per unit, compared with approximately 14 to 16 cents in Pakistan. According to him, the cost difference provides Bangladesh with an advantage in international markets and puts additional pressure on Pakistani manufacturers. He also warned that double-digit inflation was affecting both industrial activity and investment, while slower economic activity was increasing the pressure on the wider population.
Market expectations are also being shaped by the outlook for international oil prices. Faisal Mamsa, Chief Executive of Tresmark, said Pakistan’s authorities reportedly expect average inflation to reach around 7.5 per cent if oil prices move back toward $80 per barrel. If oil prices remain close to $100 per barrel, inflation could instead average around 8.2 per cent. Authorities are also reported to expect inflation to moderate after December and consider the existing 11.5 per cent policy rate appropriate under the current assumptions. However, the persistence of double-digit inflation has led a number of market participants to question whether the existing policy rate will remain unchanged for an extended period.
Recent government debt market activity has added another signal to expectations surrounding the next monetary policy decision. The government increased cut-off yields by as much as 75 basis points at the latest Treasury bill auction, with the highest yield reaching 12.49 per cent for the one-year tenor. The rise in returns on government securities has strengthened expectations among some market participants that the SBP could consider an increase in its policy rate at the next Monetary Policy Committee meeting scheduled for October 26. Higher government security yields can influence borrowing costs across the financial system and provide an indication of changing expectations about future interest rates and inflation.
The exchange rate is another factor influencing the monetary policy outlook. A relatively stable rupee can help limit the impact of imported inflation, particularly when international commodity prices are under pressure. At the same time, higher domestic fuel prices can influence demand and imports, potentially helping to reduce pressure on the external account. Mamsa said the IMF continues to emphasise a more market-based exchange rate framework, while Pakistani authorities remain cautious about creating additional imported inflation through excessive currency depreciation.
A market-based exchange rate, however, does not necessarily mean that the rupee must weaken sharply. According to Mamsa, continued strength in remittances, improving foreign exchange reserves, a manageable current account position and contained dollar demand could allow market-based price discovery to coexist with a relatively stable currency. These factors will remain important for policymakers as they balance inflation control, external stability and economic activity. With September inflation already at 10.3 per cent and oil prices continuing to create uncertainty, the SBP faces limited room to ease monetary policy. The October 26 policy meeting could therefore provide a clearer indication of whether policymakers intend to maintain the current 11.5 per cent rate or respond to renewed inflationary pressures with another adjustment.
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