Policy rate hike unlikely in final FY26 review

Market participants believe the grounds for increasing Pakistan's policy rate have largely vanished ahead of the State Bank of Pakistan's (SBP) final fiscal year 2026 monetary policy announcement. Global oil prices have remained stable or eased, despite heightened tensions in the Gulf, removing a key driver for a potential rate hike.

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Before deciding on rates, the MPC will likely assess several factors, including currency stability and the external account.

The Monetary Policy Committee (MPC) is set to meet on June 15 for its final review of FY26. The only policy rate increase this fiscal year occurred on April 27, when the SBP raised the benchmark rate by 100 basis points to 11.5%. This move was attributed to geopolitical tensions following April's conflict, which had pushed oil prices higher and disrupted global supply chains.

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Pakistan’s recent economic stability had been driven more by strong inflows and the accumulation of foreign exchange reserves than by interest rates.

However, recent developments have eased concerns about a prolonged conflict. Prospects for a US-Iran deal have improved, and a ceasefire is largely holding despite sporadic attacks. Diplomatic efforts have helped calm markets, and supply chain conditions have also improved. While renewed hostilities are not entirely ruled out, the likelihood of a broader conflict appears lower than that of a diplomatic settlement.

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If the recent inflationary pressure is being driven by oil prices and geopolitical tensions, and a regional truce emerges in the coming days, some of that pressure could subside on its own.

Faisal Mamsa, CEO of Tresmark, stated that the MPC will likely assess currency stability and the external account. He noted that Pakistan's recent economic stability stems more from strong inflows and accumulating foreign exchange reserves than from interest rates. Mamsa added that monetary policy has limited influence on supply-side inflation, and if inflationary pressure is driven by oil prices and geopolitical tensions, a regional truce could alleviate some pressure. The MPC will also consider the twin deficits and the fiscal position, critical variables for an economy historically facing external financing constraints. Analysts project average inflation for FY26 to remain around 7%, with a slight increase to over 8% in FY27.

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The MPC will also consider the twin deficits [current account and trade imbalance] before making any decision on interest rates.