SBP rate decision may be shaped by regional tensions

Market participants expect the State Bank of Pakistan (SBP) to raise the policy interest rate on Monday. Analysts link the expected tightening to rising inflation and growing geopolitical uncertainty stemming from the Gulf conflict. Most researchers see a 100 basis point increase, though some favour a smaller move. According to market participants and researchers, the SBP is expected to increase the benchmark rate by around 100 basis points to 11.5 per cent from the current 10.5 per cent. Experts highlight that while inflation remains a key factor, the dominant concern shaping expectations is heightened regional uncertainty, particularly due to the ongoing Gulf war and its potential spillover effects on energy prices, trade flows, and capital markets. Short-term inflation reached 14 per cent in the week ending April 23, with recent increases in petroleum and diesel prices further adding to inflationary pressures. A financial expert notes "unseen and highly uncertain risks" that could significantly alter Pakistan’s economic outlook, including possible slowdowns in manufacturing and rising poverty levels if inflationary pressures intensify. Bankers and analysts broadly agree a rate hike is likely, though there is disagreement over its magnitude. Some argue a 50bps adjustment would be a cautious response, while others say a 100bps increase is necessary to stabilise inflation expectations and protect financial flows. Tresmark Research anticipates the hike as a pre-emptive move to safeguard foreign inflows, counter inflation, and align with rising global bond yields. Analysts also note unusual synchronised volatility in global financial markets, complicating policy decisions. A senior banker suggests higher petroleum prices will keep inflation elevated, potentially requiring further rate increases if conditions persist. If the policy rate is raised, exporters and remittance inflows may benefit from higher returns, while importers and government borrowing costs are likely to face increased pressure.