The State Bank of Pakistan (SBP) is anticipated to keep its policy rate unchanged on Monday, as analysts adjust their expectations following Israel's military strike on Iran, expressing concerns about inflation risks due to escalating global commodity prices.

Israel announced on Friday that it conducted a preemptive strike on nuclear facilities, ballistic missile factories, and military commanders in an effort to prevent Tehran from developing a nuclear weapon.

Initially, many brokerages predicted a rate cut but revised their forecasts after the Israeli attack raised fears of a wider conflict. The spike in oil prices resulting from the escalating tensions is worrisome for Pakistan, given the potential impact on imported inflation and crude oil supplies.

Out of 14 respondents in a quick poll, 11 expect the SBP to maintain the benchmark rate at 12%, while two anticipate a 100 basis-point cut and one predicts a 50 bps reduction.

Ahmad Mobeen, a senior economist at S&P Global Market Intelligence, highlighted the risk of increased global commodity prices due to geopolitical tensions, which could lead to inflationary pressures. He also mentioned that higher import costs could impact the external sector and exchange rate.

Inflation had been decreasing for several months after peaking at around 40% in May 2023. However, it rose to 3.5% last month, surpassing the finance ministry's projection of up to 2%, partly due to the fading of the base effects from the previous year. The SBP anticipates average inflation to range between 5.5% and 7.5% for the fiscal year ending in June.

The SBP had paused its rate cuts in March after reducing rates by a total of 1,000 basis points from a high of 22%, then resumed with a 100-basis-point cut in May.

The policy meeting follows the announcement of a stringent annual budget, which included a 20% increase in defence spending but an overall 7% reduction in expenditure, with GDP growth projected at 4.2%.

The government claims that the $350 billion economy has stabilized with the help of a $7 billion International Monetary Fund bailout, which prevented a default threat.

However, some analysts doubt the government's ability to achieve the growth target amidst fiscal and external challenges. Abdul Azeem, head of research at Al Habib Capital Markets, who forecast a 50-bp cut, suggested that a lower rate could assist in reaching the GDP target of 4.2% and alleviate the burden of debt financing.