{"id":3324,"date":"2026-10-26T16:03:45","date_gmt":"2026-10-26T11:03:45","guid":{"rendered":"https:\/\/ipp-news.com\/?p=3324"},"modified":"2026-10-26T16:03:45","modified_gmt":"2026-10-26T11:03:45","slug":"pakistans-stable-rupee-makes-rate-rise-more-likely","status":"publish","type":"post","link":"https:\/\/ipp-news.com\/?p=3324","title":{"rendered":"Pakistan\u2019s stable rupee makes rate rise more likely"},"content":{"rendered":"
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Pakistan has absorbed the oil shock better than expected. But as global monetary conditions tighten, political resistance to currency depreciation is narrowing the State Bank\u2019s room to hold rates.<\/strong><\/p>\n

The State Bank of Pakistan announces its monetary policy decision today. At its last meeting, three members of the monetary policy committee voted for a 100 basis-point increase, while the other seven opted to hold. This column argued for patience: wait to see how the war affects energy prices, inflation and the external account.<\/p>\n

Six weeks on, the uncertainty has only grown. Markets expect a rate increase of 50-100bps. Yet the case for keeping the policy rate at 11.5 percent remains respectable. Neither the fiscal nor the external accounts are under significant stress, and inflation is expected to moderate in October. The stronger argument for tightening lies elsewhere: in the increasingly difficult task of maintaining a stable rupee while monetary conditions abroad become less accommodating.<\/p>\n

Pakistan has handled this year\u2019s oil shock remarkably well. Higher petroleum prices have largely been passed on to consumers, curbing demand, particularly in urban centres. Lower LNG imports have spared the country a substantial foreign exchange bill. Remittances and services exports have helped offset import growth, keeping the current account manageable. The deficit was $874m in the first quarter of FY27, against $755m a year earlier. That is a modest deterioration considering the scale of the energy shock.<\/p>\n

External financing conditions have also improved. Pakistan has regained access to international debt markets, foreign exchange reserves have reached record levels, and improved credit ratings are easing rollover concerns. Fiscal performance has remained better than targeted. These buffers give the authorities considerably more room than they had during previous episodes of oil-price volatility.<\/p>\n

October, however, has brought fresh concerns. Brent crude was above $115 a barrel at the time of writing, with markets increasingly nervous about another escalation in the US-Iran conflict. The Federal Board of Revenue is likely to miss its monthly target. Disruptions to trade with Iran have already triggered shortages and sharp price increases in the LPG market. With winter approaching, constrained LPG supplies and lower LNG availability could produce shortages as well as higher prices.<\/p>\n

The inflation outlook remains uncertain. Headline inflation averaged 10.7 percent between April and September. If oil prices settle around $100 a barrel, inflation could remain in the 9-11 percent range until March before easing towards 7 percent in the final quarter on favourable base effects. A prolonged conflict would alter that path. Equally, an end to hostilities and a reversal in energy prices could bring inflation down much faster.<\/p>\n

At 11.5 percent, the policy rate remains above current headline inflation. That provides some comfort, although the margin is not large and inflation expectations matter more than the latest reading alone. The case for raising rates rests on the risk that elevated energy prices become embedded in broader price and wage expectations, rather than on the initial oil shock itself.<\/p>\n

The import mix offers a more complicated picture. According to the Pakistan Bureau of Statistics, non-oil imports rose 15 percent in the first quarter, compared with 6 percent for petroleum. Much of the increase came from cars, machinery and other non-energy goods. Some of this reflects recovering investment and consumption, although higher energy costs may dampen urban demand in the coming months. Rural demand could prove more resilient as higher agricultural commodity prices support farm incomes.<\/p>\n

There is little in these numbers to suggest an immediate external crisis. But the risk facing Pakistan is changing. Several major central banks are tightening policy or preparing to do so as the oil shock threatens to keep inflation elevated. If Pakistan holds rates while borrowing costs elsewhere rise, the yield advantage on rupee assets narrows. That does not automatically create pressure on the currency, but it increases the importance of exchange rate expectations and investor confidence.<\/p>\n

This is where domestic policy becomes uncomfortable. Pakistan\u2019s real effective exchange rate has climbed to nearly 109, its highest level in eight years. With domestic inflation running above that of major trading partners and the nominal exchange rate barely moving, the rupee is appreciating in real terms. That gradually erodes export competitiveness and makes imports relatively more attractive. The index does not establish the precise degree of currency misalignment, but its direction is difficult to ignore.<\/p>\n

A modest, orderly depreciation would help contain that real appreciation and allow the exchange rate to absorb part of the external shock. It would also reduce the need to use higher interest rates to suppress domestic demand. Depreciation carries inflationary costs of its own, especially when imported energy is expensive. But keeping the nominal exchange rate stable while domestic prices rise is hardly costless either.<\/p>\n

The trouble is political. Economic managers have made rupee stability a centrepiece of their macroeconomic success story. There is little appetite to allow the currency to adjust, even gradually. That leaves the State Bank of Pakistan (SBP) with a narrower set of options. If external monetary conditions continue to tighten and the rupee is not allowed sufficient flexibility, interest rates will have to carry more of the adjustment.<\/p>\n

That is an expensive choice for an economy struggling to revive private investment. Higher borrowing costs will do little to increase oil supplies or resolve disruptions to LPG trade. They can restrain domestic demand and inflation expectations, but at the cost of slowing an already weak recovery.<\/p>\n

The SBP can make a defensible case for anything between no change and a 100bps increase. On domestic fundamentals alone, another six weeks of patience would be reasonable. But the risks are rising, the market has largely priced in tightening, and the central bank is unlikely to disregard the increasingly hawkish external environment.<\/p>\n

A 50bps increase appears the most likely compromise, with 100bps still possible. It would acknowledge the risks without imposing the full cost of aggressive tightening.<\/p>\n

The larger question will remain unanswered. Pakistan has demonstrated that it can absorb an oil shock without another balance-of-payments crisis. It has yet to demonstrate that it can maintain external stability without making the exchange rate a political commitment and interest rates the instrument used to defend it.<\/p>\n

Copyright Business Recorder, 2026<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Pakistan has absorbed the oil shock better than expected. But as global monetary conditions tighten, political resistance to currency depreciation is narrowing the State Bank\u2019s room to hold rates. The State Bank of Pakistan announces its monetary policy decision today. At its last meeting, three members of the monetary policy committee voted for a 100 basis-point increase, while the other seven opted to hold. This column argued for patience: wait to see how the war affects energy prices, inflation and the external account. Six weeks on, the uncertainty has only…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19],"tags":[],"class_list":["post-3324","post","type-post","status-publish","format-standard","hentry","category-english"],"gutentor_comment":0,"_links":{"self":[{"href":"https:\/\/ipp-news.com\/index.php?rest_route=\/wp\/v2\/posts\/3324","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ipp-news.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ipp-news.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ipp-news.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/ipp-news.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3324"}],"version-history":[{"count":0,"href":"https:\/\/ipp-news.com\/index.php?rest_route=\/wp\/v2\/posts\/3324\/revisions"}],"wp:attachment":[{"href":"https:\/\/ipp-news.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3324"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ipp-news.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3324"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ipp-news.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3324"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}