The State Bank of Pakistan (SBP) on Monday decided to maintain its benchmark policy rate at 10.5% during the second Monetary Policy Committee (MPC) meeting of 2026, a move that aligned with market expectations.
Analysts had widely anticipated that the central bank would keep the rate unchanged due to rising geopolitical tensions in the Middle East, which have pushed up global energy prices and raised concerns about renewed inflationary pressure.
In its Monetary Policy Statement, the central bank noted that recent data broadly matched the macroeconomic projections issued after the January meeting but warned that uncertainty has increased due to the conflict in the Middle East.
“While the incoming data was largely consistent with the macroeconomic projections shared after the January meeting, the Committee observed that the macroeconomic outlook has become quite uncertain following outbreak of the war in the Middle East,” the cental bank said in its Monetary Policy Statement.
According to the MPC, the conflict has significantly affected global markets and supply chains.
“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 MPC’s initial assessment of the evolving geopolitical situation indicates that the outlook for key macroeconomic variables for FY 26 is within the earlier projected ranges. However, risks for the macroeconomic outlook have increased significantly,” it said.
The committee also reviewed several key economic developments since its previous meeting.
“First, inflation rose to 5.8% in January and further to 7% in February 2026.
“Second, the 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.
“Third, large-scale manufacturing (LSM) grew by 0.4% y/y in December 2025, with cumulative growth reaching 4.8% in July-December FY26.
‘Fourth, consumers’ inflation expectations and confidence improved, while those of businesses remained broadly stable in February.
“Fifth, FBR tax collection remained below target in both January and February, further widening the cumulative shortfall during July-February FY26.
“Lastly, the US administration announced the imposition of uniform global tariffs, which may have noticeable implications for global trade.”
The MPC noted that uncertainty around global commodity prices and potential supply-chain disruptions remains high due to the Middle East conflict.
“In this context, the MPC deemed today’s decision as appropriate, and reaffirmed its commitment to ensure the hard-earned price stability.”
The committee also emphasised the need to accelerate structural reforms to support long-term economic growth.
Real sector
The central bank said economic activity continued to strengthen. High-frequency indicators such as auto sales, domestic cement dispatches, electricity generation and petroleum product sales (excluding furnace oil) recorded growth during July–January FY26.
Recent policy measures—including a reduction in the Cash Reserve Requirement (CRR), lower markup rates on export loans, and reduced industrial energy tariffs—have improved prospects for manufacturing.
In agriculture, wheat sowing targets have largely been achieved and input conditions remain favourable. Growth in commodity-producing sectors is expected to support services such as wholesale and retail trade as well as transport.
Based on these trends, the MPC expects real GDP growth to remain within the projected range of 3.75–4.75% in FY26, though risks remain due to geopolitical developments.
External sector
The current account recorded a $121 million surplus in January 2026, limiting the deficit to $1.1 billion during July–January FY26. Imports declined during the month, while exports and workers’ remittances remained largely stable compared to December.
Remittances continued to finance a significant portion of the trade deficit. Although net official outflows were recorded in January, foreign investment inflows rose slightly. Continued FX purchases by the SBP helped raise reserves to $16.3 billion by the end of February.
However, the central bank warned that the global 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% of GDP in FY26. In this backdrop, the Committee emphasised on the timely realisation of planned official inflows to achieve the targeted buildup in SBP’s FX reserves to $18 billion by June 2026.”
Fiscal sector
Fiscal data indicates ongoing consolidation, with the overall balance showing a surplus and the primary surplus remaining close to last year’s level, largely due to lower interest payments.
However, tax collection remained weak. Federal Board of Revenue (FBR) revenues increased 10.6% during July–February FY26, falling short of the pace required to meet the annual target.
“However, the tax collection remained moderate, rising 10.6% during July–February FY26 – well below the pace required to meet the annual target. In this context, the Committee emphasised the importance of continuing the fiscal consolidation via base-broadening measures and undertaking structural reforms to ensure macroeconomic stability and sustainable economic growth.”
Money and credit
Broad money (M2) growth slowed to 16% as of February 20, mainly due to reduced government borrowing from the banking system. At the same time, net foreign assets contributed more strongly to money supply growth.
Lower government borrowing and additional liquidity from the recent CRR cut have created more room for private sector lending.
Private sector credit increased by Rs790 billion by February 20, driven by both working capital and fixed investment demand. Lending grew particularly in textiles, wholesale and retail trade, and chemicals, while consumer financing also expanded.
Meanwhile, currency in circulation increased while deposits declined, raising the currency-to-deposit ratio and contributing to higher reserve money growth.
Inflation outlook
Headline inflation rose to 7% year-on-year in February, mainly due to the fading low-base effect in food and energy prices and adjustments to fixed electricity charges for households.
Core inflation also increased to around 7.6%.
The MPC said the impact of higher domestic energy prices may be partly offset by favourable food price trends supported by improved supply conditions and better agricultural prospects.
“At the same time, the MPC noted that this assessment is subject to significant risks, particularly those from the evolving geopolitical situation, as well as from volatile food prices and unanticipated adjustments in domestic administered energy prices.
“On balance, given these developments and risks, the Committee assessed that inflation may remain above 7 percent in the remaining months of FY26 and into FY27, it said.”
The decision to maintain the policy rate comes after the previous MPC meeting on January 26, 2026, when the central bank also kept the rate unchanged at 10.5%, despite market expectations for a cut.
Brokerage firms had largely predicted no change in the latest meeting. Arif Habib Limited (AHL) said the central bank would likely keep rates steady while signalling caution amid global uncertainty.
Similarly, Topline Securities cited a survey indicating that 96% of market participants expected no rate cut, attributing the outlook to escalating tensions in the Gulf region that have driven Brent oil prices up by about 25% in the past two to three weeks.
A Reuters poll also found unanimous expectations among analysts that the SBP would hold the policy rate steady due to rising energy prices and regional tensions that could complicate the inflation outlook.
