Market expects SBP to hike interest rate amid Gulf conflict risks

KARACHI: Financial markets are widely anticipating a rise in the policy interest rate in the upcoming monetary policy meeting scheduled for Monday, with analysts linking the expected tightening to rising inflation and growing geopolitical uncertainty stemming from the Gulf conflict.

According to market participants and researchers whom Dawn spoke with, the State Bank of Pakistan (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, although some economists believe a smaller 50bps increase is also possible.

Experts said that while inflation remains a key factor, the dominant concern shaping expectations is heightened uncertainty in the region, 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, reflecting sustained price pressures, while recent increases in petroleum and diesel prices have further added to inflationary expectations.

A financial expert said the current environment is marked by “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 that a rate hike is likely, though there is disagreement over its magnitude. Some argue that a 50bps adjustment would represent a cautious response, while others say a 100bps increase is necessary to stabilise inflation expectations and protect financial flows.

Research platform Tresmark said the anticipated hike would be a pre-emptive move aimed at safeguarding foreign inflows, countering inflation, and aligning with rising global bond yields, rather than a response to domestic data alone.

Analysts also noted that global financial markets are currently experiencing unusual synchronised volatility, with oil, currencies, equities and bonds moving simultaneously in conflicting directions, making policy decisions more complex.

A senior banker added that higher petroleum prices are expected to keep inflation elevated, suggesting that further rate increases may be required if conditions persist.

If the policy rate is raised as expected, exporters and remittance inflows may benefit from higher returns, while importers and government borrowing costs are likely to face increased pressure.