KARACHI, March 5 - Analysts participating in a recent poll expect Pakistan's central bank to leave its key policy rate unchanged at 10.5% at the next review, reflecting concerns that rising global energy prices and geopolitical tensions are clouding the near-term inflation outlook and limiting scope for further cuts.
All 10 respondents in the poll forecast that the State Bank of Pakistan (SBP) will hold the policy rate at 10.5%, matching the decision taken by policymakers in January. The SBP has eased policy substantially since mid-2024, reducing the key rate by a cumulative 11.5 percentage points from a record high of 22%.
Escalation in Middle East hostilities following attacks by the U.S. and Israel on Iran has heightened concerns over possible disruptions to shipping through the Strait of Hormuz. Market reactions have pushed oil and gas prices higher, increasing Pakistan's import bill and feeding inflationary pressures at home.
Analysts in the poll said they expect inflation to average between 6% and 8% in the coming months, while cautioning that further increases in oil prices could push inflation even higher. "Energy prices should dictate the policy rate trajectory. Inflation could average around 7% during the second half of FY26," said Muhammad Aliv, an analyst at AKD Securities.
Pakistan's heavy dependence on imported fuel leaves the economy vulnerable to global energy price shocks. Waqas Ghani, head of research at JS Capital, said higher oil prices widen the trade deficit and put pressure on the rupee. Ghani estimated that every $10-per-barrel increase in crude raises inflation by about 0.5 percentage points.
Inflation was 7% in February, up from 5.8% in January, underscoring how volatile energy markets translate quickly into domestic price dynamics. The SBP has signalled its intention to preserve a positive real interest rate to anchor inflation expectations as part of commitments under Pakistan's $7 billion IMF programme, while acknowledging that inflation could exceed the 5% to 7% target range for several months this year as growth strengthens and imports expand the trade deficit.
Governor Jameel Ahmad said last month that policymakers were focused on medium-term price stability even as the economy was projected to expand by 3.75% to 4.75% in the financial year 2026, supported by stronger domestic demand and the impact of earlier monetary easing.
Analysts noted that external risks - notably higher oil prices, pressure on the rupee and a widening trade deficit - could delay any move toward further monetary easing. These factors, they said, keep the central bank on a cautious footing despite the substantial easing already implemented.
Implications for markets and sectors
- Banking and financial markets may factor in a longer period of restrictive real rates if inflation remains elevated.
- Energy importers and the trade-exposed sectors face higher costs and balance-of-payments pressure if oil prices stay elevated.
- Currency markets may remain sensitive to shifts in oil prices and trade deficits, affecting rupee volatility.