Pakistan's central bank decided to keep its key interest rate at 11% on Monday, maintaining a cautious approach due to heightened tensions in the Middle East. The ongoing conflict between Iran and Israel has raised concerns about the country's fragile external sector and inflation rate.

A recent Reuters poll showed analysts revising their expectations for a rate cut following Israel's military strikes on Iran. The central bank highlighted potential risks to the external sector, trade deficit, and weak financial inflows, leading to its decision to leave the rate unchanged.

Despite a widening trade deficit, Pakistan's current account remained balanced in April, with foreign exchange reserves increasing to $11.7 billion by June 6. The country aims to reach $14 billion in foreign exchange reserves by the end of June.

Inflation in Pakistan has slowed down significantly since 2023 but rose to 3.5% year-on-year last month. The central bank projects average inflation between 5.5% and 7.5% for the fiscal year ending this month.

The escalating tensions in oil-producing regions have caused a surge in global oil prices, impacting Pakistan's trade deficit. The central bank's decision reflects a cautious approach in light of these geopolitical risks.

Pakistani stocks gained despite the geopolitical risks, while the rupee declined for the fifth consecutive session. The Federation of Pakistan Chamber of Commerce & Industry and the Karachi Chamber of Commerce and Industry expressed disappointment over the central bank's decision to maintain the policy rate.