KARACHI: The resurgence in inflation and mounting uncertainty due to the Israeli attack on Iran forced the State Bank of Pakistan (SBP) to remain cautious and keep its policy rate unchanged at 11 per cent.

The benchmark interest rate has been slashed by 1,100 basis points from an unprecedented 22pc since June 2024, easing it for borrowers to pump money into the economy’s growth.

After hitting a 60-year record low of 0.3pc in April, inflation surged to 3.5pc in May. Most analysts were confident that the SBP would keep the interest rate unchanged. However, a new element in the Israel-Iran war altered the scenario, causing a surge in crude oil prices that may exert pressure on the current account amid higher energy imports.

The Monetary Policy Committee (MPC) has noted that the increase in inflation in May to 3.5pc year-on-year was in line with its expectation while core inflation declined marginally,” said SBP in its Monetary Policy Statement (MPS) on Monday.

GDP growth accelerates to 3.9pc in second half

“This outlook, however, remains subject to multiple risks emanating from potential supply-chain disruptions from regional geopolitical conflicts, volatility in oil and other commodity prices, and the timing and magnitude of domestic energy price adjustments,” said the policy statement.

At the same time, the committee noted some potential risks to the external sector amid the sustained widening of the trade deficit and weak financial inflows. Moreover, some of the proposed FY26 budgetary measures may further widen the trade deficit by increasing imports, said MPS. However, workers’ remittances continued to remain strong, offsetting the impact of the widening trade deficit on the current account.

The real GDP growth for FY25 is provisionally reported at 2.7pc, and the government is targeting higher growth of 4.2pc for next year.

The SBP said that despite a substantial widening of the trade deficit, the current account remained broadly balanced in April. Global oil prices have rebounded sharply, reflecting the evolving geopolitical situation in the Middle East and some ease in US-China trade tensions, said the SBP, adding that taking stock of these developments and potential risks, it was decided to keep the real interest rate positive to stabilise inflation within the target range of 5-7pc.

The economy gained momentum during the second half of FY25, with real GDP growth accelerating to 3.9pc from 1.4pc in the first half of FY25.

The agriculture sector underperformed relative to FY24 due to a sizable decline in the production of major crops. In contrast, the industry and services sectors contributed to the uptick in real GDP growth, particularly in the second half of FY25.

Published in Dawn, June 17th, 2025