Iran war jitters to influence policy rate decision

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A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the head office in Karachi on July 16, 2019. — Reuters/File Photo
A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the head office in Karachi on July 16, 2019. — Reuters/File Photo

KARACHI: It appears that the financial market is certain that the interest rate is bound to see a rise in the next monetary policy scheduled for Monday.

At the same time, most experts believed that it was not inflation but the growing fears in the region, including Pakistan, due to the Gulf war, that would determine the direction of monetary policy.

“The risks in the Gulf war are unseen and so uncertain that nobody can claim that the economy of Pakistan and other countries like it would remain in the same shape as it is now,” said a financial expert.

He added that inflation could entirely change the economy, with greater uncertainty, in the form of a sharp decline in manufacturing and a further increase in existing poverty.

Experts see 100bps hike in SBP committee’s meeting on Monday

The short-term inflation hit 14 per cent during the week that ended on April 23, reflecting the mood of headline inflation. The government has again increased diesel and petroleum prices, an approach to shield against possible future hikes in main inflation.

Opinions divided

There was consensus among most researchers, bankers and other stakeholders of the economy that the interest rate would rise. However, opinions were divided over the size of the increase in the interest rate.

Most researchers believe that the interest rate will increase by 100 basis points to 11.5pc from the prevailing 10.5pc. However, a sizeable opinion was in favour of 50bps.

“An increase in the interest rate of up to 50bps will reflect a slight deviation from the normal situation, but the situation is highly unpredictable and uncertain even regarding the main inflation,” said S.S. Iqbal.

He believes the situation demands at least a 100bps increase in the interest rate.

It is important to note that earlier predictions during the current fiscal year about interest rate cuts or increases by experts proved wrong, as the State Bank of Pakistan’s (SBP) calculations are different and it considers long-term impacts on the economy and future global trends.

“Considering higher than expected petroleum prices and consequently inflationary pressure, the SBP is expected to increase the rate by 100bps. If conditions persist in the mid-term, the rate may further go up,” said Rashid Masood Alam, a senior banker.

Tresmark, a research-based currency tracker, believes a 100bps hike will take place, not because data compels it, but as a pre-emptive move to protect hot money flows, counter inflation, and stay aligned with rising global bond yields.

“This is no longer just an oil story. Market relationships are breaking down. Oil, bonds, foreign exchange, and equities are all moving simultaneously, often in conflicting directions, with no clear anchor,” said Faisal Mamsa, the CEO of Tresmark.

A higher interest rate will yield more money for exporters and remitters but create serious problems for importers. It will also increase the debt burden of the government, which borrows heavily from banks and corporates to accumulate liquidity needed to run the government.

Published in Dawn, April 26th, 2026

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