SBP holds key rate at 11% amid Iran-Israel conflict

ISLAMABAD: The State Bank of Pakistan (SBP) 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 central bank briefly paused its easing cycle in March after cutting rates by 10 percentage points from a record high of 22% in June 2024. The central bank announced another 100 basis-point cut in May bringing the key rate to 11%.

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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.

“While macro fundamentals are moving in the right direction, the SBP may prefer to stay cautious due to heightened global uncertainty and pending fiscal measures,” said Arif Habib Limited in a note to clients.  

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 also comes on the heels of Pakistan’s contractionary budget, where 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.