The State Bank of Pakistan (SBP) maintained its policy rate on Monday at 11 per cent, after many analysts cited inflation risks from rising global commodity prices amid Iran-Israel tensions.
The central bank’s policy rate, after being slashed by 1,000bps from 22pc since June 2024 in seven intervals, was cut to 11pc last month.
“The Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 11 per cent,” the SBP said in a statement.
Several brokerages had initially expected a cut but revised their forecasts after the Israeli strikes sparked fears of a broader conflict.
The MPC observed that global oil prices had “rebounded sharply, reflecting the evolving geopolitical situation in the Middle East and some ease in US-China trade tensions”.
“Taking stock of these developments and potential risks, the committee assessed that the real interest rate remains adequately positive to stabilise inflation within the target range of 5–7pc,” the MPC stressed.
The escalating hostilities after Israel’s attacks on Iran on Friday had triggered a sharp spike in oil prices — a worry for Pakistan given the broader impact on imported inflation from a potentially prolonged conflict and tightening of crude supplies.
Eleven of 14 respondents in a snap poll by Reuters expected the SBP to leave the benchmark rate unchanged at 12pc. Two forecast a 100 basis-point (bps) cut and one predicted a 50bps cut.
Inflation expected to ‘trend up and stablise’ in 5-7pc target range
On inflation, the MPC noted that the recent uptick in May to 3.5pc year-on-year was in line with its expectation, whereas core inflation declined “marginally”.
The headline inflation had hit an all-time low of 0.3pc YoY after declining for several months from around 40pc in May 2023.
The MPC said inflation was expected to “trend up and stabilise” in the target range. The SBP expects average inflation to range between 5.5pc and 7.5pc for the current fiscal year, which ends this month.
“This outlook, however, remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments,” the committee added.
It noted that economic growth was picking up gradually and was projected to gain further traction next year on the back of earlier rate cuts. However, the MPC cautioned about “some potential risks to the external sector amidst the sustained widening in the trade deficit and weak financial inflows”.
It observed that some of the proposed FY26 budgetary measures may further widen the trade deficit by increasing imports, adding that the decision to maintain the interest rate was “appropriate to sustain the macroeconomic and price stability”.
The MPC termed the “timely realisation of planned foreign inflows, achievement of the targeted fiscal consolidation and the implementation of structural reforms as essential to maintain macroeconomic stability and achieve sustainable economic growth”.
“The decision to hold rates was not surprising given the uncertain geopolitical outlook with oil prices spiking around 15pc,” said Mustafa Pasha, executive director at Karachi-based Lakson Investments.
“Additionally, it gives the SBP time to assess the impact of the budget and upcoming gas/electricity tariff revisions on inflation and the external account.”
Noting the key developments since its last meeting in May, the MPC said the real GDP growth for FY25 was provisionally reported at 2.7pc.
“Despite a substantial widening in the trade deficit, the current account remained broadly balanced in April,” it highlighted, also mentioning the increase in the SBP foreign exchange reserves to $11.7 billion as of June 6, owing to the $1 billion tranche by the International Monetary Fund (IMF).
“Third, the revised budget estimates indicate the primary balance surplus at 2.2pc of GDP in FY25, up from 0.9pc last year,” the MPC said, adding that the government was targeting a primary surplus of 2.4pc of the GDP for next year.
