KARACHI: The State Bank of Pakistan (SBP) is expected to maintain its benchmark policy rate at 12 per cent in its upcoming Monetary Policy Committee (MPC) meeting on Monday, as escalating geopolitical tensions in the Middle East raise concerns over imported inflation and external sector vulnerabilities.
A snap poll conducted by Reuters found that 11 out of 14 analysts expect the SBP to hold the rate steady, reversing earlier expectations of a rate cut. The shift follows Israel’s military strikes on Iranian targets on Friday, which reportedly hit nuclear and ballistic missile facilities in what Tel Aviv described as a “preemptive strike” to deter nuclear weapons development by Tehran.
The heightened hostilities have triggered a spike in global oil prices — a key risk for Pakistan, which relies heavily on energy imports. Analysts fear the conflict could escalate further, exerting upward pressure on global commodity prices and fuelling inflation domestically.
“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. “The resultant higher import bill could also threaten external sector performance and bring pressure to the exchange rate.”
Pakistan’s inflation had been on a declining trend after peaking at nearly 40% in May 2023. However, a mild uptick was recorded last month, with headline inflation rising to 3.5% — exceeding the finance ministry’s projection of up to 2% — partly due to the fading base effect.
The SBP, which paused its monetary easing cycle in March and resumed it in May with a 100 basis-point cut, has projected average inflation to remain between 5.5% and 7.5% for the current fiscal year ending in June.
Although some analysts believe further easing is warranted to stimulate economic activity, most now view a cautious approach as prudent in light of rising external risks. Abdul Azeem, head of research at Al Habib Capital Markets, was among the few still anticipating a modest 50 bps cut. “A lower rate could support the GDP target of 4.2% and reduce the debt financing burden,” he said.
The MPC’s decision will also follow the release of a contractionary federal budget for FY25, which saw a 7% cut in overall expenditures but a 20% increase in defence spending. While the government has projected economic growth of 4.2%, many analysts remain sceptical of its achievability given tight fiscal space and external financing needs.
Pakistan’s $350 billion economy has shown signs of stabilization under a $7 billion International Monetary Fund (IMF) bailout, but structural vulnerabilities persist, including a narrow tax base, weak exports, and a precarious balance of payments.
With uncertainty in global markets and the threat of renewed inflation, the SBP is expected to adopt a wait-and-see approach, preserving room to act decisively should external conditions deteriorate further.
