KARACHI: While keeping the policy rate unchanged at 10.50 percent, the State Bank of Pakistan (SBP) has observed that Pakistan’s macroeconomic outlook has become quite uncertain following the outbreak of war in the Middle East.
The Monetary Policy Committee (MPC) of the SBP, in its meeting held on Monday, noted that the initial assessment of the evolving geopolitical situation suggests that the outlook for key macroeconomic indicators for FY26 remains within the earlier projected ranges. However, it warned that risks to the macroeconomic outlook have increased significantly.
The MPC meeting, chaired by Jameel Ahmad, reviewed both domestic and international economic developments before deciding to keep the policy rate unchanged at 10.5 percent.
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Although, the MPC expects real GDP growth to remain within the earlier projected range of 3.75-4.75 percent in FY26. However, unfolding geopolitical developments have multiple risks to this projection
The Committee observed that although recent economic data remained broadly consistent with the macroeconomic projections issued after the January meeting, the country’s overall economic outlook has become more uncertain following the outbreak of war in the Middle East.
The MPC noted that the conflict in the Middle East has led to a sharp increase in global fuel prices as well as freight and insurance costs, while also affecting cross-border trade and travel.
Given the evolving nature of events, the MPC observed that the intensity and duration of the conflict will both be important determinants of the impact on the domestic economy. In this regard, the Committee acknowledged the important role of the prudent monetary and fiscal policies in increasing the economy’s resilience to shocks.
The MPC noted that macroeconomic fundamentals, especially in terms of inflation and the country’s FX and fiscal buffers, are better as compared to the time of the start of the Russia-Ukraine war in early 2022.
The Committee also noted the high degree of uncertainty in the outlook for international commodity prices and supply-chain disruptions in the backdrop of the war in the Middle East. In this context, the MPC deemed policy rate unchanged decision as appropriate, and reaffirmed its commitment to ensure the hard-earned price stability. The Committee also stressed the need for expediting structural reforms to ensure sustainable economic growth.
The MPC noted several key developments since its last meeting. Inflation increased to 5.8 percent in January and 7 percent in February 2026, while the current account posted a surplus in January, helping the SBP build foreign exchange reserves to USD 16.3 billion by February 27 through continued interbank FX purchases. Large-scale manufacturing (LSM) grew 0.4 percent year-on-year in December 2025, taking cumulative growth to 4.8 percent during July-December FY26.
Meanwhile, consumers’ inflation expectations and confidence improved, though business sentiment remained largely stable in February. The Federal Board of Revenue(FBR) tax collection stayed below target in January and February, widening the fiscal shortfall, while the United States administration’s decision to impose uniform global tariffs could affect global trade.
According to Monetary Policy Statement issued by the SBP, economic activity continued to strengthen and recent policy and regulatory measures, including the reduction in the Cash Reserve Requirement and in mark-up rates on loans to exporters by banks, and downward adjustment in energy tariffs for industrial sector, have reinforced manufacturing prospects.
In the agriculture sector, wheat sowing target has largely been met, and the input conditions remain favourable. The positive spillover impact of commodity-producing sectors is expected to support the wholesale and retail trade and transport segments of the services sector.
Based on these developments, the MPC expects real GDP growth to remain within the earlier projected range of 3.75-4.75 percent in FY26. However, the outlook is subject to risks, particularly from the unfolding geopolitical developments, the SBP said.
The current account posted a surplus of USD121 million in January 2026, containing the deficit to USD 1.1 billion in July-January FY26. Imports declined in January, whereas exports and workers’ remittances largely stabilized at December levels. Going forward, the external environment has become more challenging due to the ongoing Middle East conflict. However, the current account deficit is likely to remain within the earlier projected range of 0-1 percent of GDP in FY26. In this backdrop, the Committee emphasized on the timely realization of planned official inflows to achieve the targeted build-up in SBP’s FX reserves to USD 18 billion by June 2026.
Fiscal data showed continued consolidation, with the overall balance posting a surplus and the primary surplus remaining close to last year’s level due to lower interest payments. However, FBR tax collection grew only 10.6 percent during July-February FY26, falling short of the pace needed to meet the annual target. The Committee stressed the need for continued fiscal consolidation through tax base expansion and structural reforms to support macroeconomic stability and sustainable growth.
Since the last MPC meeting, broad money (M2) growth decreased to 16.0 percent as of February 20, due to a sharp reduction in the net budgetary borrowing from the banking system, whereas NFA’s contribution to M2 growth increased.
The Committee noted that lower budgetary borrowing, along with liquidity generated through the recent CRR reduction, has created space for greater private sector lending. Consequently, PSC expanded by Rs790 billion up to February 20, reflecting growth in both working capital and fixed investment.
Credit especially increased to textiles, wholesale and retail trade, and chemicals, whereas consumer financing continued to increase as well. Currency in circulation increased whereas deposits recorded a decline, leading to an increase in the currency to deposit ratio and a rise in reserve money growth.
Reuters adds: Central bank kept its key policy rate unchanged at 10.5 percent on Monday, pausing its easing cycle as rising global energy prices and regional tensions pose new inflation risks for the import-dependent economy.
“The Monetary Policy Committee has decided to keep the policy rate unchanged at 10.5 percent,” the State Bank of Pakistan (SBP) said on its website, adding that a detailed statement would be released soon.
The SBP has cut the key rate by a cumulative 1,150 basis points since mid-2024, from a record 22 percent in 2023, as inflation cooled sharply from multi-decade highs.
Escalating tensions in the Middle East have raised concerns about disruption to shipping through the Strait of Hormuz, a key artery for global oil supplies, pushing energy prices higher.
Pakistan imports most of its energy needs, making domestic inflation sensitive to changes in global fuel prices.
On Friday, it raised consumer prices for diesel and petrol about 20%, citing higher oil prices driven by conflict in Iran.
Governor Jameel Ahmad has previously said the economy could grow 3.75 percent–4.75 percent in FY26, supported by stronger domestic demand and earlier monetary easing, while inflation may temporarily exceed the central bank’s 5 percent–7 percent target range this year before easing.
Pakistan is in an ongoing USD7 billion IMF programme, with the Fund urging policymakers to keep monetary policy tight and data-dependent to anchor inflation expectations and strengthen external buffers.
Copyright Business Recorder, 2026