By Ariba Shahid
ISLAMABAD (Reuters) -Pakistan’s central bank kept its key interest rate unchanged at 11% on Monday, in line with expectations, as the conflict between Israel and Iran and volatile global oil prices added upside risks to inflation.
The State Bank of Pakistan briefly paused its easing cycle in March after cutting rates by 10 percentage points from a record high of 22% in June 2024. The SBP announced another 100-basis-point cut in May, bringing the key rate to 11%.
Eleven out of 14 analysts in a Reuters poll had forecast the SBP would hold the rate steady, citing inflationary risks from Israel’s recent military strikes on Iran and their impact on global commodity markets.
The bank’s Monetary Policy Committee said in a statement announcing the decision that it expected some near-term volatility in inflation and for it to gradually to edge up and stabilise in the 5-7% target range.
“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 MPC said.
Headline inflation rose to 3.5% in May, exceeding the finance ministry’s projection of up to 2%. The central bank expects average inflation to range between 5.5% and 7.5% for the current fiscal year, which ends this month.
“The decision to hold rates was not surprising given the uncertain geopolitical outlook with oil prices spiking around 15%,” 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.”
The decision also comes on the heels of Pakistan’s contractionary budget, in which it cut total spending by 7% and set a GDP target of 4.2% for fiscal year 2025-26.
The government said the $350 billion economy is stabilising under a $7 billion IMF programme, though analysts remain wary of external and fiscal pressures.
(Reporting by Ariba Shahid in Islamabad; writing by Charlotte Greenfield; editing by Swati Bhat, Bernadette Baum and Mark Heinrich)
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