SBP likely to hold policy rate at 11% amid improved macro indicators, global risks loom

The State Bank of Pakistan is widely expected to maintain the policy rate at 11%, signaling a continuation of its cautious stance however handful of analysts believed that interest rate might clipped by 50bps

According to a report of Arif Habib Ltd., domestic macroeconomic indicators have improved significantly, particularly inflation and the external account.

The Brokerage house believed that the central bank is likely to adopt a wait-and-see approach in light of emerging global risks and domestic policy adjustments.

Domestic conditions offer stability

The domestic macroeconomic landscape has clearly improved in recent months. Inflation clocked in at 3.5% in May’25, and core inflation continued its downward trend, falling to 8%.

Moreover, initial fears of fiscal slippage and inflationary budgetary measures have eased, as the recently announced budget did not introduce any aggressive spending or subsidy reversals that could stoke price pressures.

Adding to this positive momentum is the country’s strong external position. The current account posted a surplus of $1.9 billion during the 10MFY25.

A further monthly surplus is expected for May, estimated between $300 - 350 million supported by resilient remittance inflows.

The Pakistani rupee, while marginally weaker on a week-to-date basis (-1.5%), has shown relative resilience through FY25 (-1.5%). Even real GDP growth surprised to the upside, with 4QFY25 coming in at 5.47%, lifting FY25 growth to 2.68%. This suggests that economic activity is gradually gaining traction.

The improvement in macro fundamentals has been reflected in the behavior of money market yields, which have declined across both primary and secondary markets since the last MPC meeting.

The most significant softening has occurred in short- to medium-term tenors, where yields on 3-month to 12-month papers have declined by 25 to 38bps, indicating the market’s growing expectation of monetary easing ahead.

Longer-tenor yields, particularly in the 3-to-5-year range, have also moved lower by ~20 to 23bps, suggesting improved confidence in the inflation outlook.

Global risks cloud the near-term outlook

While the domestic landscape supports an easing bias, recent geopolitical developments have raised the stakes. Escalating tensions in key oil-producing regions have triggered a sharp surge in global oil prices. Benchmark crude contracts, including Brent, WTI, and Arab Light, have risen close to 10-12% WoW, with daily spikes exceeding 6% as of the latest reading.

For an oil-importing economy like Pakistan, this poses direct and indirect inflationary risks. According to our estimates, every $5/bbl increase in global oil prices (on an annualized basis) adds roughly 23bps to headline inflation directly. This does not account for indirect effects, which could arise through higher fuel costs, increased freight charges, and eventual pass-through into general consumer prices.

Additionally, any upward revision in domestic energy tariffs, though necessary to prevent further accumulation of circular debt, would carry inflationary implications. The timing and magnitude of these adjustments, alongside changes in food prices, and potential global trade disruptions, could alter the inflation outlook materially.