Higher electricity and petroleum prices are expected to push September inflation to 10.2%, raising questions over whether the SBP could resume monetary tightening.

KARACHI: Rising energy prices, higher electricity tariffs and persistent inflationary pressures could increase pressure on the State Bank of Pakistan (SBP) to raise its benchmark interest rate, with analysts warning that an escalation in Middle East tensions could prompt tighter monetary policy.

According to a research report issued by Insight Research on Tuesday, headline inflation is projected to reach 10.2% in September 2026, compared with 5.6% in September last year and 11.2% in August 2026.

The expected increase is primarily attributed to higher food prices and a rise in the housing index, while petroleum and electricity costs are also expected to put additional pressure on the Consumer Price Index (CPI).

On a month-on-month basis, inflation is projected to increase by approximately 1.1% in September, according to the report.

The latest projection has heightened concerns over Pakistan’s inflation outlook and the possibility of another monetary tightening cycle, particularly if geopolitical tensions continue to push up international oil prices and transportation costs.

Electricity and petroleum prices drive inflation

The Insight Research report identifies higher electricity charges and petroleum prices as key drivers of the expected monthly inflation increase.

The electricity index is projected to rise by approximately 15% month on month, reflecting higher fuel cost adjustments (FCA) and the reversal of the quarterly tariff adjustment (QTA) from a negative adjustment of around Rs1.98 per unit to a positive adjustment of approximately Rs0.52 per unit.

Meanwhile, the transport index is expected to increase by around 5.4% during September, primarily because of higher petroleum prices.

These developments highlight how higher energy costs can feed into domestic inflation through electricity bills, transport fares, logistics expenses and the prices of goods and services.

However, the food index is expected to decline by approximately 0.4% month on month, supported by lower prices of some perishable items.

Core inflation remains sticky

Despite expected moderation in some food prices, underlying inflationary pressures remain persistent.

Insight Research estimates core inflation at approximately 9.0% in urban areas and 8.6% in rural areas during September.

Core inflation excludes selected volatile components and is used as an indicator of broader price pressures in the economy. Persistent core inflation could complicate efforts to bring inflation towards the SBP’s desired range without affecting economic activity.

Price movements in the Sensitive Price Indicator (SPI) basket also show significant variations among individual commodities.

Onions recorded an increase of 28.7%, while motor fuel prices rose by 8.9%. Fresh vegetables, liquefied petroleum gas (LPG) and gram pulses each increased by approximately 2.6%.

Conversely, tomato prices declined by 29.1%, followed by fresh fruits at 18.7%, chicken at 6.8%, eggs at 4.6% and potatoes at 2.6%.

The divergent price movements indicate that while some food commodities have become cheaper, increases in energy-related costs continue to put pressure on household budgets.

SBP rate hike back on the table

The SBP maintained its policy rate at 11.5% at its previous Monetary Policy Committee (MPC) meeting. However, the voting pattern showed a change in the views of some committee members.

According to Insight Research, three of the 10 MPC members voted in favour of an interest rate increase, compared with a unanimous decision to maintain the existing rate at the preceding meeting.

The change in voting preferences indicates that inflation concerns have become more prominent in monetary policy discussions, although it does not establish that the central bank will raise rates at its next meeting.

Insight Research said the MPC could consider a 50-basis-point increase if geopolitical tensions intensify and place further upward pressure on energy and commodity prices.

A 50-basis-point increase would take the policy rate from 11.5% to 12%.

The research house’s assessment remains conditional on developments in the Middle East and their impact on Pakistan’s inflation outlook.

Geopolitical tensions to shape inflation outlook

According to Insight Research, Pakistan’s inflation trajectory will depend significantly on developments in the Middle East and their effects on global commodity prices, freight charges and supply conditions.

Weather-related developments could also affect food prices, adding another element of uncertainty to the inflation outlook.

Despite the prolonged US-Iran conflict and the subsequent rise in crude oil prices, the report notes that Pakistan’s external account has remained resilient, while fiscal management has continued under the International Monetary Fund (IMF) programme.

However, sustained increases in international energy prices could increase Pakistan’s import bill and feed into domestic inflation, potentially complicating economic stabilisation efforts.

The report estimates that, assuming monthly inflation of around 1% following the expected September reading, average inflation over the next 12 months could reach approximately 11.7%.

Against this projection, Insight Research estimates that a 50-basis-point policy rate increase would result in a slightly positive real interest rate.

The real interest rate represents the nominal policy rate adjusted for inflation expectations and is an important consideration in monetary policy decisions.

For businesses, households and investors, the coming months will therefore be important in determining whether the SBP maintains borrowing costs at their current level or resumes monetary tightening in response to renewed inflationary pressures.

A further rate increase would raise borrowing costs for businesses and consumers, while monetary tightening is generally intended to influence inflation and inflation expectations.

The SBP’s next monetary policy decision will depend on incoming inflation data, international energy market developments and the MPC’s assessment of whether current inflationary pressures are temporary or persistent.