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• Central bank says economic outlook uncertain due to Middle East war
• GDP growth expected to remain up to 4.75pc, inflation above 7pc
KARACHI: The State Bank of Pakistan kept the interest rate unchanged at 10.5 per cent on Monday, pausing its easing cycle as rising global energy prices and the Gulf war pose greater challenges as well as new inflation risks for the economy.
The SBP’s Monetary Policy Committee (MPC) said the macroeconomic outlook had become quite uncertain following the outbreak of the war in the Middle East.
“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,” the MPC said in statement, adding that the intensity and duration of the conflict would both be important determinants of its impact on the domestic economy.
“The high degree of uncertainty in the outlook for international commodity prices and supply-chain disruptions is in the backdrop of the war in the Middle East,” it continued.
The SBP has cut the key rate by a cumulative 1,150 basis points since mid-2024, from a record 22pc in 2023, as inflation cooled sharply from multi-decade highs.
The MPC said the macroeconomic fundamentals, especially in terms of inflation and the country’s foreign exchange and fiscal buffers, were better compared with the time of the start of the Russia-Ukraine war in early 2022.
“The evolving geopolitical situation indicates that the outlook for key macroeconomic variables for FY26 is within the earlier projected ranges. However, risks to the macroeconomic outlook have increased significantly,” it added.
In addition to the ongoing geopolitical events, the MPC said inflation rose to 5.8pc in January and further to 7pc in February. The SBP continued to purchase dollars from the interbank market to build up its foreign exchange reserves.
Large-scale manufacturing grew 4.8pc during July-December FY26, while the FBR tax collection remained below target, further widening the cumulative shortfall during July-Feb FY26.
Core inflation increased to around 7.6pc, which has been a main hurdle for the State Bank in reducing the interest rate, even as the CPI fell as low as 3pc in August FY26.
The positive spillover impact of commodity-producing sectors is expected to support the wholesale and retail trade, as well as the transport segments of the services sector. Based on these developments, the MPC expects real GDP growth to remain within the earlier projected range of 3.75-4.75pc in FY26. However, the outlook is subject to risks, particularly from unfolding geopolitical developments.
The external 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 0-1pc of GDP in FY26.
The State Bank emphasised the timely realisation of planned official inflows to achieve the targeted build-up in SBP’s foreign exchange reserves to $18bn by June 2026. The SBP said workers’ remittances continued to finance a significant part of the trade deficit. Data on fiscal operations indicated continued consolidation, with the overall balance registering a surplus and the primary surplus remaining close to last year’s level, led by contained expenditures due to lower interest payments. However, tax collection remained moderate, rising 10.6pc during July-Feb FY26 — well below the pace required to meet the annual target. “Given these developments and risks, the committee assessed that inflation may remain above 7pcin the remaining months of FY26 and into FY27,” the MPC stated.
Published in Dawn, March 10th, 2026
