SBP to hold rate as floods fuel inflation

KARACHI:

Pakistan's central bank is expected to keep its key rate steady on Monday, a Reuters poll showed, as floods that ravaged farmland and threaten fresh food inflation prompt policymakers to extend their pause on monetary easing.

Thirteen of 14 analysts surveyed forecast the State Bank of Pakistan (SBP) will hold its policy rate at 11%, while one projected a 50 basis-point cut.

Since late June, floods have swamped Punjab's farmland, disrupting supply chains and stoking inflation fears, with nearly 950 people killed, 6,500 livestock lost, 8,200 houses destroyed and 4.5 million displaced as waters move south.

"Given the uncertainty, we expect the central bank may pause in September, though our base case allows for a 50–100 bps cut by year-end," said Waqas Ghani, Head of Research at JS Global Capital.

Analysts flag GDP hit, food price shocks

Sana Tawfik, Head of Research at Arif Habib Limited, said agricultural losses could shave around 0.2% off gross domestic product (GDP) growth, though reconstruction may provide some offset.

Analysts said flood-driven supply shocks, especially in wheat, rice and vegetables, could keep inflation above the central bank's 5–7% target.

Saad Hanif of Ismail Iqbal Securities said food inflation could face "temporary shocks", with wheat prices up about 50% in a month.

Inflation eased to 3% in August from 4.1% in July, but the finance ministry, which projected 4% to 5%, warned crop losses and extreme weather could soon push prices higher.

"Manufacturers have also raised selling prices, citing higher fuel and transport costs and delays in input deliveries caused by flooding," said Ahmad Mobeen, Senior Economist at S&P Global Market Intelligence.

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 cut rates by 100 bps in May, after a March pause, and held steady in June amid oil price pressures from Middle East tensions.

Still, some see room for cuts

"Real interest rates are still high enough to allow for a cut, especially with the Fed turning dovish, but the floods are inflationary, particularly for food," said Ammar Habib, an independent analyst.

ADB warns to insure against floods

Meanwhile, an Asian Development Bank (ADB) expert urged Pakistan, and other countries in Asia and the Pacific, to integrate insurance into urban planning to limit flood losses and speed recovery.

Arup Kumar Chatterjee, Principal Financial Sector Specialist at ADB, said on Friday that cities like Lahore in Pakistan and Gurugram, India, face severe flooding risks but remain financially exposed due to poor planning. Streets turn into rivers and homes into ruins, leaving cities in financial peril. "These issues are not random; they are the result of poor planning," he noted.

"In 2023, natural hazards in Asia and the Pacific caused $65 billion in losses, with 91% of that amount uninsured. In 2024, global insured losses reached $135 billion, showing a huge protection gap of nearly 90%," wrote Chatterjee.

The ADB official pointed out that ancient cities managed risks better. Mohenjo-Daro in Pakistan and the aqueducts in Rome were designed to withstand floods.

"Today's approach to disaster management has changed. Governments often focus more on post-disaster relief than on flood prevention. This often leads to different government departments working in isolation and ignoring risk management," he said.

The cost of neglecting insurance is clear. He pointed out that Bangkok's 2011 floods caused $47 billion in damage, with only a third insured. Chennai's 2015 floods brought $3.5 billion in losses, with just 34% covered. Recent storms in Dubai also exposed major gaps.

In contrast, cities that adopt insurance fare better. During Valencia's 2024 floods, a third of $10 billion in damages was insured. Auckland's 2023 floods had 40% coverage, allowing 112,000 claims to be processed quickly.

"We have the tools to manage flood risks better, including satellite technology and real-time data analysis. If we can predict floods, we should also be able to finance protection in advance," stressed Chatterjee.

He urged that insurance be treated as infrastructure. Quick payouts based on rainfall data can help communities recover faster. He urged Pakistan and other governments to make coverage accessible, including for renters and low-income families.

"No major project should proceed without a risk financing plan," he said, adding that, "Floods are inevitable; the question is whether we can respond quickly enough to prevent despair. Every uninsured project is a risk to taxpayers, costing them in both money and stress. Cities need to embrace insurance as a foundational element of their planning, not as an afterthought."

The cost of being unprepared, he warned, far outweighs the cost of insurance.

REUTERS WITH ADDITIONAL INPUT FROM OUR CORRESPONDENT