SBP seen holding rates steady as the oil rally clouds inflation outlook

• Middle East tensions push oil-and-gas prices higher.
• Analysts warn oil prices could push inflation up further.
• Every $10 per barrel rise in crude adds 0.5% to inflation.
  

The State Bank of Pakistan (SBP) is expected to hold its key policy rate steady at a policy review on Monday, a Reuters poll showed, as rising global energy prices and regional tensions cloud the inflation outlook and limit the room for cuts.

All 10 analysts in a Reuters poll expect the SBP to hold the rate at 10.5%, after policymakers held the rate in January.

The SBP has cut the key rate by a cumulative ⁠11.5% since mid-2024, from a record high of 22%.

Escalating Middle East tensions after the US and Israel attacked Iran have raised the risk of disruption to shipping through the Strait of Hormuz and pushed oil-and-gas prices higher, adding to Pakistan's import bill and inflationary pressures.

Analysts expect inflation to average 6%–8% in coming months but warned higher oil prices could push it up further.

"Energy prices should dictate the policy rate trajectory. Inflation could average around 7% during the second half of FY26," AKD Securities analyst Muhammad Aliv said.

Pakistan's heavy reliance on imported fuel leaves it ⁠vulnerable to global price shocks.

"Higher oil prices widen the trade deficit and pressure the rupee," Waqas Ghani, head of research at JS Capital said.

Ghani said every $10 per barrel increase in crude prices adds about 0.5% to inflation, which clocked in at 7% in February, jumping from 5.8% in January.

The SBP ⁠says it aims to maintain a positive real interest rate to anchor inflation expectations under Pakistan's $7 billion IMF programme, though inflation could exceed its 5%–7% target range for a few months this year as growth ⁠picks up and imports widen the trade deficit.

Governor Jameel Ahmad told Reuters last month policymakers remained focused on medium-term price stability, even as the economy was projected to grow 3.75%–4.75% in ⁠the financial year 2026, supported by stronger domestic demand and earlier monetary easing.

Analysts said external risks, including higher oil prices, rupee pressure and a widening trade deficit, could delay any move toward further monetary easing.