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.

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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.