Policy rate hike unlikely in final FY26 review

KARACHI: The grounds for an increase in the policy rate have largely disappeared ahead of the State Bank of Pakistan’s (SBP) upcoming monetary policy announcement, as global oil prices have either remained stable or eased despite heightened tensions in the Gulf, market participants said.

The Monetary Policy Committee (MPC) is scheduled to meet on June 15 for what will be the final policy review of FY26. The only increase in the policy rate during the current fiscal year came in the previous review on April 27, when the SBP raised the benchmark rate by 100 basis points to 11.5 per cent.

The increase was attributed to geopolitical tensions following the conflict in April, which pushed oil prices higher and disrupted global supply chains.

However, analysts said developments over the past month have reduced concerns over a prolonged conflict. Prospects for a deal between the US and Iran have improved, while a ceasefire remains in place despite sporadic attacks by both sides. Iran also targeted US bases in several Gulf countries, although reports of ongoing diplomatic efforts have helped calm markets.

MPC meets on Monday amid easing Gulf tensions and oil prices

Supply chain conditions have also improved over the past month, according to market sources. While they did not entirely rule out the possibility of renewed hostilities, they said the likelihood of a broader conflict appeared lower than that of a diplomatic settlement. They noted that unresolved disputes involving Israel, including its continued presence in occupied territories and positions in Lebanon, remained a source of uncertainty.

“Before deciding on rates, the MPC will likely assess several factors, including currency stability and the external account,” said Faisal Mamsa, chief executive officer of Tresmark.

Mr Mamsa said Pakistan’s recent economic stability had been driven more by strong inflows and the accumulation of foreign exchange reserves than by interest rates. He added that monetary policy had limited influence on supply-side inflation.

“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,” he said.

“The MPC will also consider the twin deficits [current account and trade imbalance] before making any decision on interest rates. The fiscal position and current account remain critical variables, particularly for an economy that has historically faced external financing constraints,” he added.

Inflation remains a key determinant of monetary policy. Analysts expect average inflation in FY26 to remain around 7pc, while inflation in FY27 is projected to be slightly above 8pc.

“This is where things become interesting. Oil prices have shown limited reaction despite military strikes on Iran. Following a reduction in hostilities and indications from US President Donald Trump that a peace agreement could be near, Brent crude prices moved lower,” Mr Mamsa said.

“With demand from China still appearing subdued, average oil prices are unlikely to remain elevated for an extended period. Inflation is expected to soften from August onwards,” he added.

Sources in the financial sector said there was little likelihood of a further increase in the policy rate, while a reduction also appeared unlikely in the near term.

Published in Dawn, June 14th, 2026