SBP Maintains Interest Rate at 10.5% Amid Inflation Risks and Rising Oil Prices

SBP Maintains Interest Rate at 10.5% Amid Rising Inflation Risks

The State Bank of Pakistan (SBP) has decided to keep its key interest rate unchanged at 10.5%, pausing its recent cycle of rate cuts as global oil prices surge and geopolitical tensions raise new inflation concerns for Pakistan’s import-dependent economy.

The decision was announced on Monday following a meeting of the Monetary Policy Committee (MPC) of the State Bank of Pakistan.

According to the central bank, the MPC has decided to maintain the policy rate at 10.5%. A detailed monetary policy statement will be released separately.

SBP Pauses Rate Cuts After Significant Easing

The decision marks a pause in the central bank’s easing cycle after aggressive rate reductions over the past year.

Since mid-2024, the State Bank of Pakistan has cut the policy rate by a cumulative 1,150 basis points, bringing it down from a historic high of 22% in 2023. These reductions were made as inflation cooled significantly from multi-decade highs.

However, the central bank is now observing new inflation risks, mainly driven by rising global energy prices and geopolitical instability.

Middle East Conflict Creating Economic Uncertainty

In its policy statement, the MPC highlighted that the conflict in the Middle East has increased uncertainty in the global economic outlook.

The committee noted that the conflict has already led to:

• A sharp increase in global fuel prices

• Higher freight and insurance costs

• Disruptions in cross-border trade and travel

The MPC emphasized that the intensity and duration of the conflict will be important factors in determining its impact on Pakistan’s domestic economy.

Pakistan’s Economic Fundamentals Improving

Despite the growing uncertainty, the central bank noted that Pakistan’s macroeconomic fundamentals are stronger compared to the start of the Russia-Ukraine war in early 2022.

Key improvements include:

• Better inflation management

• Improved foreign exchange reserves

• Stronger fiscal buffers

The MPC’s preliminary assessment suggests that key macroeconomic indicators for fiscal year 2026 remain within previously projected ranges, although risks have increased.

Inflation Showing Signs of Rising Again

Domestic inflation has started to increase again in recent months.

January 2026 inflation: 5.8%

February 2026 inflation: 7% year-on-year

According to the MPC, the increase was mainly due to the fading low-base effect from previous food and energy prices as well as the rationalization of fixed electricity charges for households.

However, the central bank expects that improved food supply and better agricultural output could partially offset the impact of higher energy prices.

Current Account Surplus and Stronger FX Reserves

Pakistan’s external sector has shown some improvement in recent months.

The current account recorded a surplus in January despite weak official inflows. This allowed the SBP to continue purchasing foreign exchange from the interbank market, helping build reserves.

As of February 27, Pakistan’s foreign exchange reserves reached $16.3 billion.

Manufacturing Growth and Business Sentiment

Pakistan’s large-scale manufacturing (LSM) sector showed modest growth.

LSM growth reached 0.4% year-on-year in December 2025, while cumulative growth for July–December FY26 stood at 4.8%.

At the same time, consumer inflation expectations improved and consumer confidence increased. Business sentiment remained broadly stable in February.

These indicators suggest gradual improvement in economic activity despite external uncertainties.

FBR Revenue Shortfall Remains a Concern

On the fiscal side, the Federal Board of Revenue (FBR) failed to meet its tax collection targets in both January and February.

This widened the cumulative revenue shortfall for the July–February FY26 period, highlighting ongoing fiscal challenges.

The MPC stressed the need to accelerate structural reforms to ensure sustainable economic growth and long-term economic stability.

Inflation Outlook for FY26 and FY27

Looking ahead, the central bank expects inflation to remain above 7% during the remaining months of FY26 and into FY27.

The outlook remains uncertain due to potential fluctuations in global commodity prices, energy markets, and supply chain disruptions, particularly linked to the conflict in the Middle East.

For now, the committee believes maintaining the policy rate at 10.5% is the appropriate step to preserve price stability and support economic balance.