SBP keeps rates unchanged at 11.5%

The State Bank of Pakistan (SBP) left its key interest rate unchanged at 11.5 per cent on Monday, as policymakers assessed the impacts of the conflict in the Middle East on inflation and growth.

“The committee noted that global oil prices have eased following the recent positive geopolitical developments, yet they remain elevated as compared to pre-conflict levels,” the central bank said after its monetary policy committee meeting (MPC).

“Nonetheless, as anticipated in the last MPC meeting, the impact of the conflict is now reflecting in recent economic indicators,” the SBP’s statement said.“Headline inflation rose to double digits in April and May, while core inflation also edged up,” it said.

“Moreover, economic activity is showing some signs of moderation, reflecting the impact of elevated prices, austerity measures, and prevalent economic uncertainty. Meanwhile, the external account pressures remain moderate,” it added.

While evaluating the impact of recent developments and risks, the SBP noted that the macroeconomic outlook remains broadly unchanged from its last meeting in April, when it raised the key policy rate by 100 basis points (bps) to 11.5 per cent, marking its first hike in almost three years.

“In this context, the MPC assessed that the current monetary policy stance remains appropriate to guide inflation towards the target range of 5-7 per cent over the medium term,” the bank said.

Dr Khaqan Najeeb, former adviser to the finance ministry, said the SBP’s decision to maintain interest rates reflects a cautious and balanced approach amid a complex economic environment.

“While the recent easing of geopolitical tensions and decline in oil prices have reduced immediate external pressures, the impact of the Middle East conflict has already passed through to the domestic economy, with headline inflation rising to 11.7 percent in May and core inflation also moving upward,” Khaqan said. “At the same time, economic activity has shown signs of moderation due to elevated prices, fiscal restraint, and persistent uncertainty. The MPC has chosen to preserve hard-earned macroeconomic stability,” he added.

“Going forward, the scope for interest rate cuts will depend on a sustained decline in inflation towards the State Bank’s 5-7 per cent medium-term target and continued stability in the external and fiscal accounts,” he said. “The broader challenge now is to complement macroeconomic stabilisation with deeper structural reforms that enhance productivity, improve competitiveness, and place Pakistan on a path of stronger and more sustainable growth.”

The SBP expects the real GDP growth for the outgoing fiscal year to exceed the government’s estimates, although it will remain within the lower end of its projected range of 3.75-4.75 per cent. The GDP grew by 3.7 per cent in FY26, up from 3.2 per cent in FY25.

The central bank expects the ongoing conflict may continue to dampen activity in both the industrial and services sectors in the coming months. Additionally, troubling prospects for agriculture, as indicated by early reports on Kharif crops amid challenging weather conditions, may weigh on the growth outlook for FY27. The government is targeting 4.0 per cent growth for the fiscal year starting in July.

The SBP’s interest rate decision, mostly aligned with economists’ and market forecasts, follows the agreement between the US and Iran to end the war, paving the way for the reopening of the Strait of Hormuz. Many central banks are expected to keep interest rates steady, driven by optimism about easing inflationary pressures and the potential to avoid a prolonged energy shock due to falling oil prices.

Inflation likely to remain in double digits for next two months before coming down Apart from the low base effect, the Middle East conflict has fuelled inflation directly through the hike in domestic energy prices as well as indirectly through the rise in transportation and production costs, the SBP said. The latter has contributed to an increase in core inflation to 8.2 per cent in April and 8.7 per cent in May. Further, an unanticipated surge in wheat and its product prices pushed up food inflation significantly during the last two months.

Headline inflation rose sharply from 7.3 per cent in March to 10.9 per cent year-on-year (YoY) in April and 11.7 per cent in May. “The MPC assessed that inflation may remain in double digits for the next few months before gradually easing subsequently,” the SBP said.

“This outlook is subject to multiple risks, including geopolitical developments, the extent of pass-through of global prices to domestic fuel prices, the magnitude of adjustments in power and gas tariffs, potential fiscal slippages, and uncertain food prices amidst weather-related challenges.”

Economists believe that the FY27 budget presented on Friday, while providing tax relief to the salaried class, continues to rely on sources that contribute to inflation. The reliance remains on the general sales tax, petroleum development levy, and similar sources to meet the revenue target.

Source: The International News Pakistan