SBP keeps policy rate unchanged at 11% amid Iran-Israel conflict

The State Bank of Pakistan (SBP) has decided to maintain the key policy rate at 11%, citing rising inflationary risks and growing external uncertainties linked to escalating geopolitical tensions in the Middle East, particularly the Iran-Israel conflict.

The announcement came after a meeting of the Monetary Policy Committee (MPC) on Saturday. The decision follows a 100-basis-point cut in May, when the central bank lowered the rate to 11% after signs of steady disinflation. Since June last year, the SBP has slashed the interest rate by a cumulative 1,100 basis points, down from a record 22%.

According to the MPC statement, the policy rate was held steady to support macroeconomic and price stability in light of emerging risks. The committee noted that inflation in May rose to 3.5% year-on-year, in line with expectations, while core inflation declined marginally.

The MPC anticipates that inflation will increase in the near term but remain within the 5–7% target range by FY26. It also observed that economic activity is gradually picking up and is expected to accelerate further next year due to the lagged impact of previous rate cuts.

However, the committee highlighted potential threats to the external sector, including a widening trade deficit, weak financial inflows, and budgetary measures for FY26 that could raise import levels.

Among key developments cited were:

Real GDP growth for FY25 is estimated at 2.7%, with a 4.2% growth target for FY26.

Despite a widening trade deficit, the current account remained broadly balanced in April.

The recent $1 billion disbursement under the IMF’s Extended Fund Facility (EFF) raised SBP’s foreign exchange reserves to $11.7 billion as of June 6.

A primary budget surplus of 2.2% of GDP is projected for FY25, with a 2.4% target for FY26.

Global oil prices have surged due to Middle East instability and easing US-China trade tensions.