MPC holds rate at 10.5% amid oil shock

The State Bank of Pakistan (SBP) on Monday kept the benchmark policy rate unchanged at 10.5%, citing rising global uncertainty following the US-Israel strike and outbreak of war in the Middle East, which could push up fuel costs, disrupt trade flows and put pressure on Pakistan's external account and inflation outlook.

The SBP warned that the intensity and duration of the Middle East conflict would determine its impact on Pakistan's economy, particularly through the external sector. Higher global oil prices could increase the import bill, potentially reversing recent improvements in the current account balance and exerting pressure on foreign exchange reserves and the rupee.

"This MPC meeting gained added significance amidst the sharp spike in global crude oil prices driven by regional turmoil," noted Topline Securities.

Despite these risks, the Monetary Policy Committee (MPC) meeting, held on March 9, 2026, assessed that macroeconomic fundamentals were currently stronger compared to the period preceding the Russia-Ukraine war in 2022, with improved inflation dynamics and stronger foreign exchange buffers. The central bank reiterated that prudent monetary and fiscal policies would remain critical in protecting the economy from external shocks.

The MPC noted that Pakistan recorded a current account surplus of $121 million in January 2026, helping contain the cumulative deficit to $1.1 billion during July-January FY26. Imports declined during the month, while exports and workers' remittances remained broadly stable compared with December levels. Remittances continued to finance a large share of the trade deficit, providing support to the external account.

The improvement in the external position allowed the SBP to continue purchasing dollars from the interbank market, resulting in a buildup of foreign exchange reserves to $16.3 billion as of February 27.

Analysts at Arif Habib Limited (AHL) highlighted that Pakistan's external repayment profile remained manageable for the current fiscal year. Total external debt repayments for FY26 stand at $25.6 billion, of which $14.6 billion has already been repaid or rolled over, including roughly $7 billion in repayments.

However, the central bank cautioned that the global environment had become more challenging due to geopolitical tensions.

Going forward, the SBP expects the current account deficit to remain within the previously projected range of 0-1% of gross domestic product (GDP) in FY26, though this outlook remains vulnerable to oil price volatility and disruptions in international trade routes.

The MPC also stressed the importance of the timely realisation of planned official inflows to achieve the targeted increase in SBP's foreign exchange reserves to $18 billion by June 2026.

On the domestic front, inflation has begun to edge up after reaching multi-year lows earlier in the fiscal year. Headline inflation rose to 5.8% in January and further to 7% in February 2026, mainly due to the fading of favourable base effects from food and energy prices and the increase in fixed electricity charges for households.

Core inflation also increased to around 7.6%, indicating persistent underlying price pressures. The MPC said that inflation could remain above 7% during the remaining months of FY26 and may extend into FY27, particularly if global commodity prices remain volatile.

However, the central bank noted that improving agricultural prospects and better food supplies could help offset part of the inflationary pressure from higher fuel and energy prices. Additionally, relatively stable inflation expectations may limit second-round effects from fuel price increases.

Economic activity has shown gradual improvement in recent months. High-frequency indicators, including auto sales, domestic cement dispatches, electricity generation and petroleum product sales (excluding furnace oil), recorded growth during July-January FY26.

Large-scale manufacturing (LSM) posted a modest 0.4% year-on-year increase in December 2025, bringing cumulative growth for the first half of the fiscal year to 4.8%. The central bank said recent policy measures, such as reducing the cash reserve requirement, lowering mark-up rates on export financing and reducing industrial energy tariffs, had strengthened prospects for manufacturing activity.

In agriculture, wheat sowing targets have largely been achieved, and input conditions remain supportive, which could provide a positive spillover to services sectors such as trade and transportation.

Based on these developments, the SBP maintained its earlier projection for real GDP growth between 3.75% and 4.75% in FY26, though it acknowledged that geopolitical developments pose significant downside risks to this outlook.

Fiscal data also showed signs of consolidation, with the overall budget balance recording a surplus and the primary surplus remaining close to last year's level. Lower interest payments helped contain expenditures.

However, tax collection remained below expectations. The Federal Board of Revenue (FBR) posted a 10.6% increase in revenues during July-February FY26, which is significantly below the pace required to meet the annual target. The MPC stressed the need for further fiscal consolidation through tax base expansion and structural reforms to maintain macroeconomic stability.

The easing of government borrowing, combined with liquidity generated through the reduction in cash reserve requirements, created room for increased lending to the private sector. Private sector credit expanded by Rs790 billion up to February 20, driven by demand for working capital and fixed investment financing.

Credit growth was particularly strong in the textile sector, wholesale and retail trade, and chemicals, while consumer financing also recorded an increase. Currency in circulation increased during the period, while deposits declined, pushing up the currency-to-deposit ratio and contributing to growth in reserve money. Market analysts noted that the central bank's decision was widely expected.