Pakistan holds key rate at 11 percent as Mideast conflict overshadows growth push

ISLAMABAD: Pakistan's central bank kept its key policy rate unchanged at 11 percent on Monday, maintaining a cautious stance as heightened geopolitical tensions and volatile global oil prices add new risks to inflation and the fragile external sector.
A Reuters poll released earlier on Monday had shown analysts revising their expectations for a rate cut in light of Israel's military strikes on Iran that began on Friday and have since intensified, pushing up global commodity prices.
'The [Monetary Policy] Committee noted some potential risks to the external sector amidst the sustained widening in the trade deficit and weak financial inflows. Moreover, some of the proposed FY26 budgetary measures may further widen the trade deficit by increasing imports,' the central bank said, announcing its decision to leave the rate unchanged.
'In this regard, the Committee deemed today's decision appropriate to sustain the macroeconomic and price stability.'
Inflation in Pakistan has slowed markedly since peaking at around 40 percent in May 2023. However, last month it rose to 3.5 percent year-on-year, above the finance ministry's projection of up to 2 percent, partly due to the fading of favorable base effects. The central bank projects average inflation between 5.5 percent and 7.5 percent for the fiscal year ending this month.
The bank paused its easing cycle in March, following cumulative cuts totaling 1,000 basis points from a record high of 22 percent, and resumed it with a 100-basis-point reduction in May.
Monday's meeting came days after the government presented a tight annual budget, which increased defense spending by 20 percent but reduced overall expenditure by 7 percent. It projects GDP growth at 4.2 percent for the next fiscal year, up from a provisional estimate of 2.7 percent for the current year.
The MPC noted that despite the widening trade deficit, the current account remained broadly balanced in April, and foreign exchange reserves rose to $11.7 billion as of June 6 after the completion of the first review under the International Monetary Fund's Extended Fund Facility.
Revised budget estimates show the primary surplus at 2.2 percent of GDP for FY25, up from 0.9 percent last year, with a higher target of 2.4 percent for the upcoming fiscal year.
Global oil prices have rebounded sharply, driven by the evolving Middle East crisis and some easing of US-China trade tensions, the MPC noted.
'Taking stock of these developments and potential risks, the Committee assessed that the real interest rate remains adequately positive to stabilize inflation within the target range of 5–7 percent,' the statement said.
It added that timely foreign inflows, planned fiscal consolidation, and structural reforms remained essential to maintain macroeconomic stability and achieve sustainable growth.

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Pakistan says sharing battlefield intel with China on India air war last month

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'We have been on alert so we have not lowered guards, that I can confirm,' the defense minister said, particularly due to concerns Indian Prime Minister Narendra Modi could resort to fresh military action as he was under pressure from a public questioning how Pakistani forces struck military facilities deep inside the country and downed Indian jets. Modi also has domestic political pressures to manage ahead of elections in Bihar, a pivotal swing state that is crucial for both national and state-level power equations. 'Modi has internal compulsions to avenge [the May conflict] … There are elections around the corner… and his popularity has plummeted, his political opponents can smell blood, politically,' Asif said. 'That can drive him to some desperate measures, otherwise, I don't think so there is a possibility of some replay of what happened a month back.'

Arab News

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Al Arabiya

10 hours ago

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Middle East tensions put investors on alert, weighing worst-case scenarios

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