Pakistan’s central bank has opted to keep the policy rate unchanged despite rising global uncertainties, particularly the economic fallout from the escalating conflict in the Middle East. The decision, taken by the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP), has sparked debate among economists and analysts who question whether the move adequately reflects the growing risks to the country’s inflation outlook and economic stability.
The MPC decided to maintain the policy rate at 10.5 percent in its latest meeting. In its Monetary Policy Statement (MPS), the committee acknowledged that the macroeconomic outlook had become “quite uncertain” following the outbreak of the Middle East conflict. According to the central bank, the scale and duration of the war would be key factors determining its impact on Pakistan’s economy.
However, some observers argue that describing the situation as uncertain understates the seriousness of the potential economic consequences. Several major fuel supply companies in the Gulf region — including firms from Saudi Arabia, the United Arab Emirates, Kuwait and Qatar — have already invoked force majeure clauses in their contracts. Such clauses allow companies to suspend contractual obligations in the event of extraordinary circumstances beyond their control. These countries are among Pakistan’s primary suppliers of petroleum products, meaning any disruption in supply chains could quickly affect domestic energy availability and prices.
The geopolitical crisis has also had immediate repercussions in global financial markets. Bond yields have risen sharply, reflecting increased risk perceptions among investors. At the same time, global markets anticipate a significant rise in inflation due to surging energy prices.
Before the conflict began, international crude oil prices were hovering in the mid-60-dollar-per-barrel range. Since the start of hostilities, prices have surged to above 100 dollars per barrel and continue to trend upward. The spike in energy prices has already prompted downward revisions in economic forecasts across Western economies, while futures markets suggest that interest rates may increase globally in response to renewed inflationary pressures.
Against this backdrop, the SBP’s decision to keep the policy rate unchanged has drawn scrutiny, particularly regarding the reasoning presented in the Monetary Policy Statement.
The first point of contention relates to inflation trends. Headline inflation rose from 5.8 percent in January to 7 percent in February, representing an increase of 1.2 percentage points in just one month. Critics point out that this increase contrasts with the central bank’s earlier decision to reduce the policy rate by 50 basis points in December 2025, when inflation had declined by only half a percentage point — from 6.1 percent in November to 5.6 percent in December.
The rise in energy prices could further intensify inflationary pressures, especially after a sharp increase in domestic fuel prices. Petrol and diesel prices were recently raised by Rs55 per litre, a move that is likely to push transportation costs and overall living expenses higher. Such developments could worsen poverty levels in the country. The World Bank estimated last year that 44.7 percent of Pakistan’s population — approximately 107.95 million people — was already living below the poverty line.
The central bank also stated in its policy statement that core inflation had increased to around 7.6 percent. However, the source of this figure was not clearly specified. According to data released by the Pakistan Bureau of Statistics (PBS), core inflation in urban areas stood at 7.2 percent in January and declined slightly to 7.1 percent in February, while rural core inflation remained unchanged at 8.3 percent during the same period.
Another point raised by analysts concerns the external sector. While the SBP highlighted a current account surplus recorded in January 2026, critics note that the broader trend remains negative. During the July–January period of the current fiscal year, Pakistan recorded a current account deficit of approximately $1.1 billion. Meanwhile, the trade deficit widened significantly, reaching $20.5 billion in the first half of the fiscal year compared with $15.9 billion during the same period the previous year.
In response to the widening deficit, the central bank reportedly intervened in the foreign exchange market by purchasing dollars from the interbank market to strengthen its foreign exchange reserves.
The manufacturing sector’s performance also raises questions about the monetary policy stance. The Monetary Policy Statement cited large-scale manufacturing (LSM) growth of 0.4 percent year-on-year by December 2025, with cumulative growth estimated at 4.8 percent during the first half of the fiscal year.
However, industry representatives dispute the strength of this recovery. According to business groups, around 150 factories have closed in recent months due to rising production costs and weak demand. In addition, several multinational companies have reportedly exited the Pakistani market. Manufacturers have repeatedly called for reductions in input costs — including electricity tariffs, taxes and borrowing costs — to improve competitiveness with regional economies.
Another claim in the policy statement that has drawn criticism relates to consumer sentiment. The SBP stated that consumers’ inflation expectations and confidence had improved in February, while business expectations remained broadly stable. Critics argue that this assessment appears inconsistent with the acknowledged rise in inflation and the broader economic uncertainty triggered by global developments.
Fiscal performance is another area of concern. Tax revenues during the July–February period increased by 10.6 percent compared with the previous year. While this represents growth in collections, the increase remains below official targets, suggesting that revenue projections agreed between the government and the International Monetary Fund (IMF) may have been overly optimistic.
Some analysts believe that the decision to keep the policy rate unchanged reflects pressure from the government to support economic growth. Lower interest rates can encourage private sector borrowing, which in turn can stimulate investment and industrial activity. However, such considerations must be balanced against the need to maintain price stability.
The IMF has repeatedly emphasised the importance of maintaining a tight and data-driven monetary policy. In its second review of Pakistan’s ongoing programme, the Fund stated that monetary policy should remain sufficiently restrictive to ensure that inflation remains anchored within the SBP’s target range.
If the conflict in the Middle East persists and global energy prices remain elevated, Pakistan could face renewed inflationary pressures. Under such circumstances, economists warn that the central bank may ultimately be forced to raise the policy rate significantly — possibly by 150 to 300 basis points.
The IMF has also urged Pakistan to strengthen the functioning of its foreign exchange market. Specifically, the Fund has called on the SBP to deepen the interbank foreign exchange market and allow the exchange rate to act as the primary shock absorber in times of economic stress. However, progress on these reforms has been gradual.
The broader challenge facing Pakistan’s economic management lies in balancing external obligations, domestic inflation pressures and growth requirements. Since 2019, successive governments have struggled to implement structural reforms needed to strengthen fiscal and economic resilience. At the same time, the IMF has maintained strict conditions for financial support, limiting the government’s policy flexibility.
As Pakistan navigates an increasingly volatile global environment, the effectiveness of its monetary policy will play a crucial role in maintaining macroeconomic stability. Decisions taken by the central bank in the coming months will likely determine whether the country can manage rising external pressures while sustaining economic recovery and protecting vulnerable segments of the population.