Pakistan raises its policy rate to 12% as the oil shock reaches central banks and airlines

The State Bank of Pakistan (SBP) raised its benchmark rate by 50 basis points to 12% on Monday, its first increase since April. Nine of the ten members of the Monetary Policy Committee voted for the move, which took effect on October 27. The central bank cited inflation risk from the Middle East conflict and said oil above $100 a barrel threatens second-round effects across the economy. It aims to return inflation to its 5% to 7% target over the medium term.

The decision split opinion in Karachi. Dawn reports that foreign investors welcomed the increase. Domestic business groups called it counterproductive for stabilization, industrial growth and export competitiveness. Foreign holders of Pakistani debt gain from a higher yield and a central bank that defends the rupee. Local manufacturers pay more to borrow while their energy costs also rise.

Airlines show the same energy shock reaching companies. Thailand's Nok Air suspended three southern domestic routes from October 27 because of fuel costs. In the United States, JetBlue Airways reported a wider quarterly loss on fuel costs. Its chief executive said margins were improving under a plan to cut costs and raise premium revenue.

Interest rates cannot add oil supply. Pakistan raised its rate to protect its currency and its credibility with external creditors, because a country that imports most of its energy cannot let the rupee fall while crude trades above $100.