KARACHI: Pakistan's central bank faces a harder inflation calculus heading into next week's rate decision, as fresh data show consumer prices accelerating and analysts point to petroleum costs and currency movements as key signals of what lies ahead.
Inflation picks up pace ahead of Sept. 14 rate decision
The State Bank of Pakistan's Monetary Policy Committee is scheduled to meet Monday, Sept. 14, for the sixth time this year to decide whether to hold, raise or cut the benchmark policy rate, which has stood at 11.5% since the committee last met in July.
National consumer price inflation rose to 11.1% year-over-year in August, up from 9.2% in July, according to data cited in a policy outlook released by the Institute of Cost and Management Accountants of Pakistan (ICMA). Core inflation also strengthened, climbing to 8.8% in urban areas and 8.5% in rural areas.
At its July meeting, the central bank held the rate steady at 11.5%, judging the stance appropriate for steering inflation toward its medium-term target of 5% to 7%. Policymakers at the time flagged global energy-price swings, rising input costs and administered energy-price adjustments as key risks.
External channels seen as early warning signs
The ICMA report argues that two external factors, Pakistan's petroleum import bill and the rupee's exchange rate against the dollar, offer early clues to where inflation is headed, since their effects on the broader economy often show up with a lag.
Higher petroleum-related costs tend to ripple outward, the report says, pushing up transportation, freight, electricity generation and production expenses before ultimately showing up in the prices of other goods and services. A weaker rupee has a similar effect, raising the local-currency cost of imported fuel, machinery, chemicals and other dollar-denominated goods even when world prices hold steady.
Using a statistical technique called Wavelet Transform Coherence, which examines how the relationship between two variables shifts over different time horizons rather than assuming it stays constant, ICMA found that petroleum import movements preceded headline inflation at three-to-five-month and six-to-nine-month intervals during 2022 and 2023.
A similar lead-lag pattern showed up between petroleum imports and core inflation during the same period, which the report says points to broader cost pass-through beyond fuel prices alone.
The exchange rate showed a less consistent pattern. It led headline inflation mainly on a six-to-eight-month horizon in 2022-23, but that relationship flipped between roughly July 2025 and January 2026, when inflation instead moved ahead of currency shifts. The report concludes the exchange rate is not a uniformly reliable leading indicator.
Looking at 2026, ICMA said the recent rise in headline inflation alongside higher energy costs fits the petroleum-driven pattern identified in its analysis, while a relatively stable rupee suggests currency pressure is not playing the same outsized role it did in 2022-23.
ICMA calls for gradual, data-dependent approach
Based on those findings, ICMA recommended the central bank take a cautious, wait-and-see approach rather than rushing into rate cuts, gradually easing only if inflation, the exchange rate and external costs continue to stabilize, with an eventual goal of reaching single-digit rates.
The group also urged the SBP to avoid cutting rates on the strength of a single favorable inflation reading, instead waiting for sustained moderation in both urban and rural core inflation alongside currency stability.
Other recommendations included clearly distinguishing temporary price spikes from more persistent, broad-based inflation in its public communications, publishing scenario analyses showing how the inflation outlook might shift under different combinations of oil prices and rupee movements, and maintaining adequate foreign exchange buffers without targeting a specific rupee level.
Market participants expect the rate to hold steady
A separate survey conducted by Topline Securities found widespread expectation that the central bank will leave the rate unchanged Monday. Of those polled, 84% expect the policy rate to hold at 11.5%, while 14% anticipate a half-point increase and 2% expect a full-point hike.
Topline said the expectation of steady rates is largely tied to inflation forecasts that, even with oil near $95 a barrel, remain below 9% for the 2027 fiscal year on average, implying a real interest rate spread of more than 250 basis points over inflation, in line with historical norms.
Improving foreign exchange reserves and a contained current account balance are also supporting the case for holding rates steady, the brokerage said, noting that yields on three-month and six-month Treasury bills have stayed largely unchanged since the last policy meeting at 11.41% and 11.68%, respectively.
Topline said it also expects the SBP to hold the rate at 11.5% at Monday's meeting, citing the sufficient real rate spread and an improving external position following a recent $3 billion Eurobond issuance. But the brokerage cautioned that persistently high oil prices and food inflation could still force a half-point to full-point rate increase at subsequent meetings in October or December.
Recent developments have added to the uncertainty. Tensions between the United States and Iran have renewed volatility in global oil markets, while domestic pump prices for petrol have risen by 24 rupees per liter since the last policy meeting. Diesel prices, by contrast, edged down just 2 rupees per liter despite a cap on refining margins.
Looking further ahead, market participants surveyed by Topline were split on where rates will stand by March 2027: 35% expect the rate to remain at 11.5%, 45% expect it to fall below that level, and 20% expect it to rise above it. Topline itself expects the rate to hold steady through March 2027 unless sustained high oil prices and food inflation force further tightening.
On inflation, survey respondents were similarly divided over the outlook for the current fiscal year, with 45% projecting average inflation of 8% to 9%, 18% expecting 9% to 10%, 16% expecting 7% to 8% and 22% expecting inflation above 10%. Topline said it now expects inflation to average above 8.5% for the fiscal year, an upward revision from its earlier forecast of 8% to 8.5%, if oil prices hold between $90 and $95 a barrel.
The brokerage said it now expects September inflation to come in at a double-digit rate, reversing an earlier forecast of single-digit inflation, citing an expected roughly 10% month-over-month jump in electricity bills tied to fuel-cost and quarterly tariff adjustments, along with a sharp rise in petrol prices that has pushed up its transport inflation estimate to 3.3% month-over-month from a prior forecast of 0.15%.
