Pakistan’s central bank kept its key interest rate unchanged on Monday, in line with market expectations, and signaled that it would pause its tightening cycle as record-high inflation may have peaked.

The State Bank of Pakistan’s (SBP) key rate remains at a record high of 21 per cent. The central bank has raised the rate by 1125 basis points since April 2022 to curb soaring inflation.

The monetary policy committee (MPC) “views inflation to have peaked at 38 per cent in May 2023, and barring any unforeseen developments, expects it to start falling from June onwards”, the SBP said in a statement.

The committee signaled it was likely done lifting rates for now, but acknowledged that stance was contingent on “effectively addressing the prevailing domestic uncertainty and external vulnerabilities.”

“On balance, the MPC views the current monetary policy stance, with positive real interest rates on a forward looking basis, as appropriate to anchor inflation expectations and to bring down inflation towards the medium term target - barring any unexpected domestic and external shocks,” the statement said.

Analysts said that the decision was largely expected but Pakistan’s broader economic challenges, including repayment of its debt, continued to loom.

“This was expected as inflationary pressure are easing ... State Bank of Pakistan believes real rates are positive on forward looking basis thus justifying this decision,” said Sohail Mohammed, chief executive of brokers Topline Securities. “I think that biggest issue is how will Pakistan repay its upcoming 22 billion dollar debt repayment.”

As well as soaring inflation, cash-strapped Pakistan has been grappling with fiscal imbalances and critically low levels of reserves that barely cover a month of imports.

The International Monetary Fund’s release of bailout funds has stalled, though talks are continuing.

The MPC expects domestic demand to remain subdued due to high interest rates, domestic uncertainty and continuing stress on the external account. It said broad money growth had decelerated in May compared to the previous year, largely due to a substantial fall in private sector credit and a contraction of net foreign assets of the banking system. Meanwhile Pakistan’s finance minister said on Saturday a projection in the government’s budget of 3.5% economic growth for the year ending in June 2024 was a “realistic target”.

The target was “on the lower side”, Ishaq Dar told a press conference in Islamabad, a day after presenting the budget for the fiscal year 2023-24.

The budget is being closely watched by the International Monetary Fund (IMF) as the South Asian country seeks further bailout money during an economic and balance of payments crisis.

Dar said he was “hopeful” that Pakistan would pass its next IMF review, the country’s ninth, but that he “didn’t think” it would clear reviews beyond that.

In the year ending this month, Pakistan’s gross domestic product (GDP) was projected to grow just 0.29%. The fiscal deficit for the following fiscal year was projected at 6.54% of GDP, according to the budget.

Dar said on Saturday there was “no more room” in the budget to reduce the fiscal deficit target by any further.