What the central bank did
Pakistan's central bank lifted its target rate by half a percentage point to 12% on Monday, its first increase since April. The move lined up with expectations from most economists in a Bloomberg poll.
Speaking in Karachi after the decision, Governor Jameel Ahmad said, "The inflation outlook was carefully reviewed." He said conditions had deteriorated meaningfully since the prior meeting, pointing to the US-Iran conflict as a key driver.
Why prices are a worry
Ahmad highlighted oil trading above $100 a barrel and rising wheat costs, and said these pressures would fade only gradually, pushing back the timeline for inflation to return to target. Pakistan is especially exposed to energy shocks because it relies heavily on imports.
Officials are focused on preventing the initial surge in prices from becoming embedded. The bank cautioned that higher food and energy costs could lift inflation expectations and eventually filter into core inflation. As Ahmad put it, the "secondary impact is something we need to be concerned about."
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The tradeoff and the backdrop
The decision captures a tough balance: pricier oil is stoking inflation while also pressuring activity. In Pakistan, growth came in below forecasts during the fiscal year's final quarter, which extended through June, signaling a fading rebound.
Even so, the outlook has brightened in recent months, and both Moody's Ratings and S&P Global Ratings upgraded Pakistan's sovereign credit rating. For investors, the picture now mixes a higher policy rate and persistent inflation pressures with fresh support from rating upgrades.
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