Pakistan central Bank Expected to Hold Steady Amid Geopolitical Tensions
Table of Contents
analysts predict teh State Bank of Pakistan will maintain its policy rate following Israel’s strike on Iran, citing potential inflation risks from rising commodity prices.
the State Bank of Pakistan (SBP) is widely anticipated to maintain its policy rate at its upcoming meeting,according to a recent Reuters poll. This decision comes as manny analysts have revised their expectations of a rate cut following Israel’s military strike on Iran, primarily due to concerns about inflation stemming from increasing global commodity prices.
Israel stated on Friday that its forces targeted nuclear facilities, ballistic missile factories, and military commanders in a “preemptive strike” aimed at preventing Tehran from developing atomic weapons.
Several brokerages had initially anticipated a rate cut, but adjusted their forecasts after the Israeli strikes heightened fears of a broader regional conflict. The escalating tensions have led to a sharp increase in oil prices, posing a critically important challenge for Pakistan due to the potential impact on imported inflation and the tightening of crude supplies.
The Reuters snap poll revealed that 11 out of 14 respondents expect the SBP to maintain the benchmark rate at 12 per cent. Two respondents predicted a 100 basis-point cut, while one anticipated a 50 bps cut.
Ahmad Mobeen, senior economist at S&P Global Market Intelligence, noted, “There remains an upside risk of a rise in global commodity prices in light of geopolitical tensions which could mark a return to inflationary pressures.” He added, “The resultant higher import bill could also threaten external sector performance and bring pressure to the exchange rate.”
pakistan has experienced a decline in inflation in recent months, after it reached approximately 40pc in May 2023.
However, last month saw an increase in inflation to 3.5pc, exceeding the finance ministry’s projection of up to 2pc, partly attributed to the fading of base effects from the previous year. The SBP projects average inflation to be between 5.5pc and 7.5pc for the fiscal year ending in June.
The SBP paused its easing cycle in March after cumulative cuts of 1,000 basis points from a record high of 22pc, and resumed it with a 100-basis-point reduction in May.
The upcoming policy meeting follows the release of a tight annual budget, which included a 20pc increase in defense spending but a 7pc reduction in overall expenditure, with GDP growth forecast at 4.2pc.
The government asserts that the $350 billion economy has stabilized, supported by a $7 billion International Monetary Fund bailout that helped avert a potential default.
Tho, some analysts remain skeptical about the government’s ability to achieve the projected growth target, citing ongoing fiscal and external challenges.
Abdul Azeem,head of research at Al Habib Capital markets,which forecast a 50-bp cut,said a lower rate could “support the GDP target of 4.2pc and reduce the debt financing burden”.
Economic Pressures Mount on Pakistan’s Central Bank
The central bank’s decision comes at a time of considerable economic uncertainty, with global events adding to existing domestic pressures.
“There remains an upside risk of a rise in global commodity prices considering geopolitical tensions which could mark a return to inflationary pressures.”
Understanding Pakistan’s Monetary Policy
frequently Asked Questions
- Why is the SBP expected to hold the policy rate?
- Concerns about rising global commodity prices due to geopolitical tensions, particularly the conflict between Israel and Iran, have led analysts to believe that maintaining the current rate is necessary to manage potential inflationary pressures.
- How does the conflict between Israel and Iran affect Pakistan’s economy?
- The conflict has caused a spike in oil prices, which could lead to imported inflation in pakistan, impacting the country’s import bill and perhaps putting pressure on the exchange rate.
- What is Pakistan’s projected GDP growth for the current fiscal year?
- The government projects a GDP growth of 4.2% for the current fiscal year, although some analysts are skeptical about achieving this target due to fiscal and external challenges.
Anya Sharma is a financial journalist covering economic trends and policy decisions in south Asia. She has a decade of experience reporting on macroeconomic issues.
Sources
