In calmer times, the State Bank of Pakistan (SBP) might have been tempted to continue easing interest rates. After all, inflation had cooled considerably, the rupee had stabilized, and the external account was finally showing signs of life. But these aren’t calm times.
The Monetary Policy Committee (MPC) meets this Monday, June 16, for the first time since the federal budget – and despite earlier expectations of a rate cut, markets are now betting that the central bank will hold the policy rate steady at 11%.
Now Why the U-Turn? Until a few days ago, the debate was around how much the SBP would cut. Now, the conversation has shifted to whether it should even cut at all. So, what changed? In one word: geopolitics.
Israel’s sudden military strike on Iran sent global oil markets into panic mode. Benchmark crude prices surged 10-12% in a matter of days – Brent, WTI, and Arab Light all spiked sharply. For an oil-importing economy like Pakistan, this is a red flag.
Oil isn’t just a number on a Bloomberg screen – it filters into everything. Higher oil price means costlier transport, costlier electricity, and ultimately, higher inflation. Pakistan’s leading brokerage firm Arif Habib Limited (AHL) estimates that a $5/barrel increase in global oil prices adds about 23 basis points to Pakistan’s headline inflation. That’s before one factor in the possible domestic hikes in gas and electricity tariffs, which are now all but confirmed before the new fiscal year begins.
The implication is clear: the inflation battle is far from over. Inflation is Down But Not Out
Yes, inflation has declined, dramatically so. From a peak of nearly 40% in May 2023, headline inflation dropped to 3.5% in May 2025. That’s a big win. But it’s also deceptive.
That low reading was largely due to base effects and temporary drops in food and energy prices. Those supports are already starting to erode. With oil surging again and the rupee under quiet but persistent pressure, the risk of a reversal in inflation trends is real.
Let’s not forget: Pakistan has been here before. Loosen too soon, and inflation can come roaring back. The SBP, which cut rates by 1,100 basis points since June 2023 including a 100bps cut in May may now be forced to hit pause.
As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” And in a volatile country like Pakistan, it’s also a political one.
Budget Pressures and IMF Commitments: Complicating matters further is the recently announced federal budget. Defence spending saw a 20% jump, while overall expenditures were cut by 7% – a political balancing act to meet IMF expectations. The government has committed to collecting a massive Rs 1.4 trillion through the petroleum levy (PL) in FY26.
But here’s the problem: with oil prices rising and consumption patterns shaky, this target now looks increasingly optimistic. In the first nine months of FY25, the government managed to collect only Rs 834 billion, just 71% of its revised estimate.
To plug the gap, Islamabad has already abolished the Rs 60/litre cap on petroleum levy, quietly collecting Rs 18-20 more per litre. This will help shore up revenues in the short term, perhaps an additional Rs 300 billion annually but it’s inflationary in nature. It’s a fiscal necessity, not a growth strategy.
The Energy Ministry is now seeking cabinet approval for further hikes in gas and electricity tariffs, again to meet IMF conditions. These adjustments, while necessary, could deliver another blow to already fragile household budgets – and could spike inflation once again.
The Market Speaks-Market sentiment has shifted swiftly. In a Reuters snap poll, 11 out of 14 analysts now expect a status quo. AHL and Topline Securities, two of the most watched brokerages in Pakistan, agree that the SBP is likely to adopt a wait-and-watch approach.
Topline’s latest poll shows that 56% of participants now expect no rate cut at all, up sharply from 31% in the last round. Only 19% anticipate a modest 50bps cut, while a small 25% hope for a 100bps surprise – a scenario that now seems highly unlikely. Even though the SBP has “space” for further cuts thanks to positive real interest rates, prudence may prevail. Why risk it?
To the SBP’s credit, the external side of the economy looks stronger. The current account is in surplus. Remittances are at record highs. Oil import costs, despite the recent spike, are still below 2022 highs. And reserves are expected to cross the $14 billion mark by end-June.
But this doesn’t guarantee stability. The rupee remains vulnerable, especially if global risk aversion picks up. Any future delay in IMF disbursements or a shock in the bond market could put pressure on the currency and thus, inflation expectations.
This is why the central bank may choose caution over confidence. The Bottom Line- Pakistan is at a critical juncture. Macroeconomic indicators have undoubtedly improved, but they rest on a shaky geopolitical foundation. Oil prices, tariff hikes, IMF conditions, and fiscal balancing acts all feed into the inflation equation.
The SBP must balance competing objectives: support growth without stoking inflation, maintain currency stability without suffocating domestic demand.
That’s why, come Monday, the most likely outcome is a hold at 11%. Not because the economy doesn’t need a cut, but because it can’t afford a misstep.
Sometimes, doing nothing – at least for now – is the smartest thing a central bank can do.