SBP maintains policy rate at 10.5% in view of evolving Middle East situation

KARACHI, Mar 09 (APP):The State Bank of Pakistan (SBP), Monday, kept the policy rate unchanged at 10.5 percent in view of the evolving geopolitical situation in the Middle East and its subsequent macroeconomic implications.

The incoming data, though, was largely consistent with the January 26 macroeconomic projections and initial assessment of the situation indicated that FY26 outlook for key variables is within the earlier projected ranges; the Monetary Policy Committee (MPC), in its meeting here at SBP, deemed it appropriate to keep the policy rate unchanged at 10.5%, observing the uncertainties in the macroeconomic outlook ‘following the outbreak of the war in the Middle East’.

The MPC, according to the monetary policy statement, 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 and also affected cross-border trade and travel.

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, reviewing key developments, noted that inflation rose to 5.8% in January and further to 7% in February 2026, current account recorded a surplus in January, which, amidst weak official inflows, led to continued interbank FX purchases by the SBP and the buildup in FX reserves to $16.3 billion as of February 27.

The MPC also noted growth in large-scale manufacturing (LSM) in December 2025 along with improvement in consumers’ inflation expectations and confidence. However, FBR tax collection remained below target in both January and February, further widening the cumulative shortfall during July-February FY26 while imposition of uniform global tariffs by the US administration may have noticeable implications for global trade.

Owing to 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, the MPC termed the stagnation of the policy rate as appropriate, and reaffirmed its commitment to ensure the hard-earned price stability, stressing the need for expediting structural reforms to ensure sustainable economic growth.

In the real sector, economic activity continued to strengthen with higher growth during July-January FY26 as the reduction in the Cash Reserve Requirement and in markup rates on loans to exporters by banks, downward adjustment in energy tariffs for the industrial sector and other recent policy and regulatory measures have reinforced manufacturing prospects.

In the agriculture sector, wheat sowing target has largely been met, and the input conditions remain favorable. 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, subject to risks, particularly from the unfolding geopolitical developments.

The External Sector witnessed a $121 million surplus in the current account in January 2026, containing the deficit to $1.1 billion in July–January FY26. Imports declined in January, whereas exports and workers’ remittances largely stabilized at December levels with remittances continuing to finance a significant part of the trade deficit.

In the backdrop of projected 0 – 1 percent current account deficit of GDP in FY26, the Committee emphasized on the timely realization of planned official inflows to achieve the targeted buildup in SBP’s FX reserves to $18 billion by June 2026.

The MPC observed continued consolidation in fiscal operations with the overall balance registering a surplus and the primary surplus remaining close to last year’s level. However, noting a low tax collection during July–February FY26, the Committee emphasized the importance of continuing the fiscal consolidation via base-broadening measures and undertaking structural reforms to ensure macroeconomic stability and sustainable economic growth.

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, it noted.

The headline inflation rose to 7.0 percent y/y in February and core inflation increased to around 7.6 percent, the committee observed and assessed, “The impact of higher expected domestic energy prices is likely to be partially offset by recent favorable movement in food prices amidst improved supply of key items and better prospects of agriculture produce.” The ongoing anchored inflation expectations and stable inflation environment are likely to somewhat limit the second-round impact of the increase in domestic fuel prices, it added.

Assessing the significant risks, particularly those from the evolving geopolitical situation, as well as from volatile food prices and unanticipated adjustments in domestic administered energy prices, the Committee projected that inflation may remain above 7% in the remaining months of FY26 and into FY27.