KARACHI: Pakistan's central bank announced on Monday that it has kept the benchmark rate unchanged at 11.5 percent for the second consecutive time this fiscal year, citing heightened uncertainty due to the Middle East conflict that has disrupted energy supplies and created inflationary pressures worldwide. 

The central bank's Monetary Policy Committee (MPC) held its second meeting of the current fiscal year on Monday. The MPC said it has decided to keep the policy rate unchanged at 11.5 percent as the conflict in the Middle East intensifies. It also noted that commercial banks have become more cautious, as economic conditions worsen worldwide. 

"The Monetary Policy Committee (MPC) decided today at its meeting to maintain the policy rate at 11.5 percent," the SBP said in a statement. "Seven out of the committee’s 10 members supported the decision to keep the policy rate unchanged."

The decision comes a week before an International Monetary Fund (IMF) mission arrives in Pakistan for the next review of its $7 billion loan program. The IMF team will also conduct a broader assessment of Pakistan's economic developments and progress on commitments made to the Fund. 

The central bank's decision to keep the policy rate unchanged was in line with market expectations. A recent survey by brokerage firm JS Global Capital Limited showed that 77 percent of the respondents expected the policy rate to remain unchanged, while 23 percent saw room for a reduction of 50 to 100 basis points.

"The recent intensification of the prolonged Middle East conflict has led to further increase in already elevated global commodity prices, while supply chain disruptions have persisted,” the State Bank of Pakistan (SBP) said.

Pakistan's consumer prices rose to 11.1 percent in August from 9.2 percent in July, moving further above the SBP's medium-term inflation target of 5-7 percent.

The central bank said recent inflation outturns were driven mainly by food inflation, while the Middle East conflict intensifying has kept energy inflation at elevated levels.

"Increased fuel prices translated into higher transport costs, which pushed core inflation to 8.7 percent," it said. 

"The MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7 percent over the medium term." 

The MPC inflation is expected to gradually ease towards the 5-7 percent target by June 2027. The central bank retained its growth outlook for this fiscal year at 3.5 to 4.5 percent.

"Economic activity, after moderating in Q4-FY26 (April-JuneFY26) amidst conflict-related disruptions, appears to be gradually picking up in the subsequent period," it said.

'OPPRESSIVE LEVEL'

Pakistani commerce body, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), rejected the SBP's decision.

"Holding the benchmark interest rate at an oppressive level will continue to severely stifle economic activity," said FPCCI President Atif Ikram Sheikh in a statement on Monday.

He termed the sustained high cost of capital as a primary catalyst for declining exports.

"Exporters are actively losing their hard-earned global market share to regional competitors who benefit from highly accessible, single-digit interest rates," he said.

Muhammad Waqas Ghani, head of research at JS Global Capital Pakistan Limited, said the SBP was trying to balance the recovering economy against renewed inflationary pressures.

"Biggest risk, however, remains the external account," the economist told Arab News.

He said a prolonged conflict between the US and Iran will drive oil and commodity prices higher, which will then put pressure on inflation and the current account.

Shankar Talreja, head of research at Karachi-based brokerage firm Topline Securities Limited, said the central bank was satisfied with Pakistan's foreign exchange reserves hence it did not change the interest rate. 

He said the government had already paid around $3.5 billion of the total $11.5 billion external debt repayment for FY27 and has to pay the balance by June 2027. 

"It seems like the external account, despite higher oil prices, is quite at a comfortable level," Talreja said. "This is the major reason why central bank has left the rate unchanged."