Many analysts have revised their predictions for a rate cut by Pakistan's central bank in light of Israel's recent military strike on Iran, citing inflation risks from increasing global commodity prices. The State Bank of Pakistan is anticipated to keep its policy rate steady on Monday, as fears of a broader conflict have caused several brokerages to change their forecasts.

Israel's announcement of targeting nuclear facilities, ballistic missile factories, and military commanders in a preemptive strike to prevent Iran from developing an atomic weapon has raised concerns among analysts. The resulting spike in oil prices poses a significant worry for Pakistan due to potential imported inflation and a squeeze on crude supplies.

Out of 14 respondents in a quick poll, 11 expect the benchmark rate to remain at 12%, while two anticipate a 100 basis-point cut and one predicts a 50 bps cut. Geopolitical tensions and the impact on global commodity prices could lead to inflationary pressures, according to Ahmad Mobeen, a senior economist at S&P Global Market Intelligence.

Inflation in Pakistan had been decreasing for several months after peaking at around 40% in May 2023. However, a recent uptick to 3.5% last month, above the finance ministry's projection, has raised concerns. The SBP foresees average inflation between 5.5% and 7.5% for the fiscal year ending in June.

The central bank had paused its rate cuts in March after reducing rates by 1,000 basis points from a record high of 22% and resumed with a 100-basis-point cut in May. The policy meeting follows the release of a tight annual budget, with Pakistan increasing defense spending by 20% while reducing overall expenditure by 7% and forecasting GDP growth at 4.2%.

Pakistan's $350 billion economy has stabilized under a $7 billion IMF bailout, averting a default threat. Despite the government's growth target of 4.2%, some analysts doubt its feasibility given fiscal and external challenges. Abdul Azeem, head of research at Al Habib Capital Markets, believes a lower rate could help achieve the GDP target and alleviate the burden of debt financing.