Pakistan holds key rate at 11% as geopolitical tensions stoke inflation risks
ISLAMABAD :Pakistan's central bank kept its key interest rate unchanged at 11 per cent 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 per centage points from a record high of 22 per cent in June 2024. The SBP announced another 100-basis-point cut in May, bringing the key rate to 11 per cent.
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 per cent 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 per cent in May, exceeding the finance ministry's projection of up to 2 per cent. The central bank expects average inflation to range between 5.5 per cent and 7.5 per cent 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 per cent," 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 per cent and set a GDP target of 4.2 per cent 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.
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