As Middle East tensions grow, Pakistan’s central bank on Monday pressed the pause button on additional rate cuts, deciding to maintain the key policy rate at 11%.
The State Bank of Pakistan (SBP) announced on Monday, citing surging inflationary pressures and international uncertainty fueled by the escalating Iran-Israel conflict.
Only last month, the SBP had reduced the rate by 100 basis points to respond to decelerating inflation. But this time, the Monetary Policy Committee (MPC) went slow. With oil prices rising and geopolitical tensions posing a threat to economic stability, the committee deemed it too early to further relax monetary policy.
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In a statement, the MPC said, “Inflation in May rose to 3.5% year-on-year, as expected, while core inflation saw a slight dip.” However, it warned that inflation could rise in the near term due to external shocks, especially from global oil markets. The committee reaffirmed that inflation is likely to stabilize within the 5-7% target range during the next fiscal year (FY26), assuming no major disruptions.
The growing Iran-Israel war has driven the region into a perilous new era. An Israeli pre-emptive attack on Iranian nuclear and military facilities has ignited fears of a wider war. The oil prices have already surged, which is bad news for Pakistan. The increase in global commodity prices is now a major worry, particularly since they are directly contributing to inflation.
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Despite these difficulties, the SBP is optimistically cautious. Economic growth, at 2.7% provisionally reported for FY25, is forecast to increase to 4.2% by next year. This is because of the delayed impact of past rate reductions and better macroeconomic management under the IMF program.
Still, there are hurdles. The MPC flagged a growing trade deficit and weak financial inflows as major risks. Some of the proposed FY26 budget measures might increase imports, widening the deficit further. Yet, April’s current account remained largely balanced, and foreign reserves rose to $11.7 billion after Pakistan received a $1 billion disbursement under the IMF’s Extended Fund Facility.
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Another positive sign: the primary balance surplus climbed to 2.2% of GDP in FY25, and the government is targeting 2.4% for FY26. But analysts remain wary. The budget increased defence spending by 20% while cutting overall expenditure by 7%, raising questions about whether the 4.2% growth target is realistic amid fiscal and external pressures.
Market sentiment also shifted rapidly. A Reuters poll showed that many analysts had initially predicted another rate cut. But after Israel attacked Iran, forecasts changed overnight. Rising oil prices and fears of regional geopolitical conflict pushed the expectation toward a rate hold instead.
The SBP emphasized that maintaining macroeconomic stability now depends on timely foreign inflows, strict fiscal discipline, and real progress on structural reforms.
