UPDATE 1-Pakistan holds key policy rate for third straight time 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.

Thirteen of 14 analysts in a Reuters poll had expected the central bank to keep rates on hold, with one forecasting a 50-bps cut. Floods have swamped farmlands in Punjab, killing over 950 people and displacing 4.5 million, disrupting supply chains and fuelling food price fears.

Analysts have said crop damage and transport delays could push inflation above the State Bank of Pakistan's 5–7% target. "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 central bank said in its statement.

It, however, added that the economy is on a significantly stronger footing to withstand the negative fallout of the ongoing floods as compared to previous major flood events. Inflation eased to 3% in August from 4.1% in July, but the finance ministry warned crop losses and extreme weather could soon push prices higher.

The SBP has cut rates by 1,100 basis points since June 2024, when they stood at a record 22% after inflation peaked near 40% in 2023. It last lowered rates by 100 bps in May and held it steady in June and July.

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