KARACHI: The State Bank of Pakistan (SBP) on Monday kept its benchmark policy rate unchanged at 11%, citing heightened external risks and inflationary pressures linked to the escalating conflict between Iran and Israel.
The decision comes a month after the central bank reduced the rate by 100 basis points, marking the first cut in nearly two years. Since June 2023, the SBP has slashed interest rates by a total of 1,100 basis points from a historic high of 22% as inflationary pressures began to ease.
In a statement following its Monetary Policy Committee (MPC) meeting, the SBP noted that May’s year-on-year inflation rate rose to 3.5% — in line with expectations — while core inflation saw a slight decline. However, the central bank expects inflation to trend upward in the near term before stabilising within the 5–7% target range during FY26.
The MPC pointed to several key risks, including widening trade deficits, tepid financial inflows, and the impact of budgetary measures for FY26, which could raise imports and pressure the external account. The committee also acknowledged volatile oil prices driven by geopolitical tensions in the Middle East and fragile global supply chains.
“The committee deemed today’s decision appropriate to sustain macroeconomic and price stability,” the statement said.
Growth and External Sector Outlook
The SBP noted that economic recovery was underway, supported by the cumulative effects of past rate cuts. Provisional GDP growth for FY25 stands at 2.7%, with the government targeting 4.2% in FY26.
Despite a widening trade deficit, the current account remained broadly balanced in April. Moreover, the successful completion of the first IMF review under the Extended Fund Facility (EFF) resulted in a $1 billion disbursement, boosting the SBP’s foreign exchange reserves to $11.7 billion as of June 6.
Fiscal performance also showed signs of improvement, with the primary budget surplus for FY25 revised to 2.2% of GDP, up from 0.9% in the previous year. The government aims to raise this to 2.4% in FY26.
Geopolitical Risks Loom Large
The policy decision was closely watched in the wake of Israel’s recent preemptive strike on Iran, targeting military leaders and nuclear sites. The escalation prompted a surge in global oil prices and raised fears of prolonged regional instability.
While some market analysts had predicted another rate cut following May’s easing, expectations shifted amid concerns over imported inflation. A Reuters poll on Monday showed consensus building around a rate hold due to rising energy prices and regional uncertainty.
Outlook and Key Risks
The MPC warned that inflation could experience temporary volatility due to global commodity price swings, potential supply-chain disruptions, and upcoming energy price adjustments. It reiterated the importance of sustained foreign inflows, fiscal consolidation, and structural reforms to support macroeconomic stability and long-term growth.
“The real interest rate remains adequately positive,” the SBP said, reaffirming its stance to manage inflation within target while allowing for gradual economic recovery.
