SBP to hold rates as tensions in Middle East overshadow growth push: report

KARACHI: Pakistan’s central bank is expected to hold its policy rate on Monday, a Reuters poll showed, as many analysts shifted their previous view of a cut in the wake of Israel’s military strike on Iran, citing inflation risks from rising global commodity prices.

Israel said on Friday it targeted nuclear facilities, ballistic missile factories and military commanders in a “preemptive strike” to prevent Tehran from building an atomic weapon. Several brokerages had initially expected a cut but revised their forecasts after the Israeli strikes sparked fears of a broader conflict. The escalating hostilities triggered a sharp spike in oil prices -- a worry for Pakistan given the broader impact on imported inflation from a potentially prolonged conflict and tightening of crude supplies.

Eleven of 14 respondents in a snap poll expected the State Bank of Pakistan (SBP) to leave the benchmark rate unchanged at 12 per cent. Two forecast a 100 basis-point cut and one predicted a 50bps cut. “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,” said Ahmad Mobeen, senior economist at S&P Global Market Intelligence.

“The resultant higher import bill could also threaten external sector performance and bring pressure to the exchange rate.” Inflation in the South Asian country has been declining for several months after it soared to around 40 per cent in May 2023.

Last month, however, inflation picked up to 3.5 per cent, above the finance ministry’s projection of up to 2.0 per cent, partly due to the fading of the year-go base effects. The SBP expects average inflation between 5.5 per cent and 7.5 per cent for the fiscal year ending June. The central bank paused its easing cycle in March after cumulative cuts of 1,000 basis points from a record high of 22 per cent, and resumed it with a 100-basis-point reduction in May.

The policy meeting follows the release a tight annual budget, which saw Pakistan raise defence spending by 20 per cent but overall expenditure was reduced by 7.0 per cent, with GDP growth forecast at 4.2 per cent.

Pakistan says its $350 billion economy has stabilised under a $7 billion IMF bailout that had helped it staved a default threat.Some analysts are sceptical of the government’s ability to reach the growth target amid 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 4.2 per cent and reduce the debt financing burden”.