SBP Likely to Hold Policy Rate Steady Amid Rising Global Risks
Pakistan’s central bank is widely expected to keep its benchmark interest rate unchanged at 12% in its upcoming monetary policy meeting on Monday, according to a Reuters snap poll, as rising geopolitical tensions shift the inflation outlook and curb expectations of further monetary easing.
Out of 14 analysts surveyed, 11 predicted no change, while two expected a 100-basis-point cut and one projected a 50-basis-point reduction.
From Rate Cut Hopes to Policy Pause: What Changed?
Until last week, the consensus among analysts leaned toward a possible rate cut, following the State Bank of Pakistan’s (SBP) 100-basis-point reduction in May and improving inflation dynamics. However, Israel’s recent preemptive military strikes on Iran, targeting nuclear and ballistic missile sites, have sparked fears of a broader regional conflict that could send oil and commodity prices surging.
This has prompted analysts to reassess Pakistan’s inflation trajectory, particularly given the country’s dependence on energy imports.
“There remains an upside risk of a rise in global commodity prices in light of geopolitical tensions which could mark a return to inflationary pressures,” said Ahmad Mobeen, senior economist at S&P Global Market Intelligence.
Imported Inflation and Currency Concerns Return to Spotlight
Rising global oil prices, which jumped over 6% after the Israel-Iran escalation, pose a serious threat to Pakistan’s external sector. A higher import bill could weaken the rupee, increase domestic fuel prices, and reignite inflationary pressures, just as the country appeared to be emerging from a high-inflation phase.
The SBP had paused its aggressive easing in March, after cutting rates by 1,000 basis points from a record high of 22%. The move was part of an effort to balance economic recovery with inflation control.
Inflation Trends and Economic Outlook
Pakistan’s headline inflation had been cooling for several months, down from a peak of around 40% in May 2023, but the latest data showed an uptick to 3.5% in May — above the finance ministry’s forecast of 2%.
The SBP expects average inflation between 5.5% and 7.5% for the ongoing fiscal year ending in June 2025, suggesting limited room for aggressive easing.
Meanwhile, the government recently presented a tight Rs17.6 trillion federal budget that prioritizes fiscal consolidation over expansion. Despite a 20% increase in defence spending, overall expenditure was slashed by 7%. The GDP growth target is set at 4.2%, but many economists remain skeptical of achieving it given fiscal constraints and external headwinds.
Balancing Growth and Stability: Analyst Perspectives
Some economists argue that modest rate cuts could help support growth without immediately reigniting inflation.
“A lower rate could support the GDP target of 4.2% and reduce the debt financing burden,” said Abdul Azeem, Head of Research at Al Habib Capital Markets, which predicts a 50-basis-point cut.
But the broader consensus is that the SBP may prefer caution over stimulus, especially as inflation volatility and geopolitical risks re-enter the equation.
Conclusion: Wait-and-See Mode Likely to Prevail
With the Middle East crisis far from resolved, energy markets on edge, and IMF oversight still active, the SBP is expected to adopt a wait-and-see approach to ensure macroeconomic stability. A surprise cut remains possible but unlikely unless geopolitical tensions ease.
The central bank’s decision on Monday will serve as a key signal for markets, investors, and policymakers assessing Pakistan’s economic resilience in a turbulent global environment.
