KARACHI: Pakistan’s central bank is expected to hold its policy rate today, Monday, a Reuters poll showed, as many analysts shifted their previous view of a cut in the wake of Israel’s military strike on Iran, citing inflation risks from rising global commodity prices.
Israel said on Friday it targeted nuclear facilities, ballistic missile factories and military commanders in a “preemptive strike” to prevent Tehran from building an atomic weapon.
Several brokerages had initially expected a cut but revised their forecasts after the Israeli strikes sparked fears of a broader conflict.
The escalating hostilities triggered a sharp spike in oil prices — a worry for Pakistan given the broader impact on imported inflation from a potentially prolonged conflict and tightening of crude supplies.
Eleven of 14 respondents in a snap poll expected the State Bank of Pakistan (SBP) to leave the benchmark rate unchanged at 11 percent. Two forecast a 100 basis-point cut and one predicted a 50 bps cut.
“There remains an upside risk of a rise in global commodity prices in light of geopolitical tensions which could mark a return to inflationary pressures,” said Ahmad Mobeen, senior economist at S&P Global Market Intelligence.
“The resultant higher import bill could also threaten external sector performance and bring pressure to the exchange rate.”
Inflation in the South Asian country has been declining for several months after it soared to around 40 percent in May 2023.
Last month, however, inflation picked up to 3.5 percent, above the finance ministry’s projection of up to 2 percent, partly due to the fading of the year-go base effects. The SBP expects average inflation between 5.5 percent and 7.5 percent for the fiscal year ending June.
The central bank paused its easing cycle in March after cumulative cuts of 1,000 basis points from a record high of 22 percent, and resumed it with a 100-basis-point reduction in May.
The policy meeting follows the release a tight annual budget, which saw Pakistan raise defense spending by 20 percent but overall expenditure was reduced by 7 percent, with GDP growth forecast at 4.2 percent.
Pakistan says its $350 billion economy has stabilized under a $7 billion IMF bailout that had helped it staved a default threat.
Some analysts are skeptical of the government’s ability to reach the growth target amid fiscal and external challenges.
Abdul Azeem, head of research at Al Habib Capital Markets, which forecast a 50-bp cut, said a lower rate could “support the GDP target of 4.2 percent and reduce the debt financing burden.”
Pakistan set to hold policy rate as Israel-Iran conflict overshadows growth push
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Pakistan set to hold policy rate as Israel-Iran conflict overshadows growth push
- Eleven of 14 respondents in a snap poll expected central bank to leave the benchmark rate unchanged at 11 percent
- Central bank paused its easing cycle in March after cumulative cuts of 1,000 basis points from a record high of 22 percent
Pakistan warns IMF Middle East oil shock could derail economic recovery
- Pakistan, IMF began formal talks this week on Islamabad’s $7 billion Extended Fund Facility loan program
- Oil prices rose sharply on Monday amid US, Israel and Iran’s conflict in Middle East disrupts energy supply
KARACHI: Pakistan’s Finance Minister Muhammad Aurangzeb this week told a visiting International Monetary Fund (IMF) delegation that volatility in global energy markets poses potential risks for the country’s economic recovery, as oil prices rise sharply amid the ongoing conflict between US, Israel and Iran in the Middle East.
Oil prices rose sharply on Monday as US and Israeli attacks on Iran, as well as Tehran’s retaliatory strikes around the Gulf sent disruptions through the global energy supply chain. Attacks throughout the region, including on two vessels traveling through the Strait of Hormuz, have restricted countries’ ability to export oil to the rest of the world.
Higher global energy prices could lead to consumers worldwide paying more for petrol and shelling out more for groceries and other goods, at a time when many in Pakistan and around the world are already feeling the impacts of inflation.
Pakistan began formal talks with an IMF delegation on Monday, as Islamabad prepares for the next review of its $7 billion bailout program. The IMF team is in Pakistan to conduct a review under the Extended Fund Facility (EFF) approved in September 2024, a multi-year program aimed at stabilizing the economy after a balance-of-payments crisis, high inflation and dwindling foreign exchange reserves.
“On economic performance, the minister shared that recent indicators point toward gradual recovery, with positive trends in growth and key sectors,” the Finance Division said in a statement on Monday.
“However, he acknowledged emerging global headwinds, including evolving geopolitical developments and volatility in international energy markets, which pose potential risks.”
Aurangzeb informed the IMF mission that Pakistan has constituted a high-level committee to closely monitor the evolving situation and ensure coordinated policy responses.
The finance minister assured the IMF that while economic stabilization efforts were necessary to restore macroeconomic balance, Islamabad is mindful of their social impact and would continue to pursue policies aimed at enhancing social spending to protect the vulnerable.
Aurangzeb informed the IMF delegation of the government’s reforms regarding the energy and tax sectors. He reiterated the government’s commitment to undertaking key privatization transactions and restructuring initiatives related to state-owned enterprises during the year.
Iva Petrova, who led the IMF mission, shared insights which included her team’s discussions with Pakistani officials in Karachi regarding the loan program reviews, the Finance Division said. Both sides agreed to hold further discussions in the coming days.
Pakistan entered into the IMF’s program to strengthen its public finances, foreign exchange reserves and restore macroeconomic stability after periods of economic volatility.
Islamabad has sought to expand economic growth through reforms in key sectors mandated by the IMF, bolstering trade relations with traditional and regional allies in recent months, and taking measures to enhance its exports.
