Gulf War Uncertainty Likely to Keep Pakistan's Policy Rate Unchanged

Pakistan's State Bank is widely anticipated to maintain its current policy interest rate of 11.5% at its upcoming monetary policy meeting on Monday, July 27. This decision is largely attributed to the heightened uncertainty stemming from the ongoing Gulf war and its subsequent impact on global oil prices.

Analysts note that the conflict has driven international oil prices above $100 per barrel, creating significant inflationary pressures worldwide, including in Pakistan. While the government and the State Bank aim to keep average consumer price index (CPI) inflation within the 7-8% range for fiscal year 2027, achieving this target is seen as dependent on regional developments. The central bank's priority appears to be maintaining macroeconomic stability, even at the cost of slower economic growth.

This focus on stability is reflected in the State Bank's recent monetary policy actions. After a 50 basis point reduction to 10.5% in December 2025, the rate was increased by 100 basis points to 11.5% in April 2026. Since then, the rate has remained unchanged despite calls from industrial sectors for a reduction. The central bank has refrained from adopting a more pro-growth stance by lowering interest rates, which could encourage greater liquidity for the private sector.

Furthermore, banks have shown a preference for investing in government securities over increasing private-sector lending. During fiscal year 2026, banks invested Rs5.9 trillion in government papers, while the private sector received only Rs1.4 trillion, primarily for short-term working capital. Experts believe there is little likelihood of either a rate cut or an increase, as lower rates could fuel inflation, while a hike would further dampen economic growth. The World Bank projects Pakistan's economic growth below 4% for FY27, contrasting with the government's target of over 4%. The evolving regional situation, particularly the course of the Gulf conflict, will significantly shape Pakistan's economic outlook, making an unchanged policy rate the most probable outcome.