SBP keeps a calm face in rising war storm

March 10, 2026 (MLN): The State Bank of Pakistan’s (SBP) decision to keep the policy rate unchanged at 10.5% reflects a cautious balancing act at a time when the global economic environment has suddenly become more volatile.

While the Monetary Policy Committee (MPC) noted that domestic macroeconomic indicators remain broadly within previously projected ranges, the outbreak of conflict in the Middle East has introduced additional uncertainty that complicates the policy outlook.

At its core, the SBP’s decision signals strategic patience rather than policy complacency.

However, the move has triggered debate among policymakers and the business community about whether maintaining the current stance is prudent or whether a preemptive tightening would have been more appropriate.

Despite the sudden geopolitical shock emanating from the Middle East conflict, which has already pushed global energy prices higher, increasing freight and insurance costs, SBP opted for MPC’s cautious tone.

For a country like Pakistan, which is heavily dependent on imported energy, such shocks can quickly transmit into the domestic economy.

The SBP itself acknowledged the sensitivity of Pakistan’s macroeconomic framework to oil prices.

According to the central bank’s estimates, every $10 per barrel increase in oil prices can raise the import bill by around $1.5 billion and add roughly 20 basis points to inflation.

The risk became more visible after the government increased petrol prices by Rs55 per litre, which will inevitably feed into transportation costs, food prices, and broader inflationary pressures in the coming months.

Under such circumstances, financial markets were widely expecting the SBP to reverse its easing trajectory and start tightening policy again, especially given the IMF’s repeated emphasis on maintaining a sufficiently tight monetary stance to anchor inflation expectations.

Instead, the MPC chose to wait for clearer signals before altering policy.

Headline inflation has increased from 5.8% in January to 7% in February, largely due to the fading of favorable base effects and adjustments in electricity charges. Core inflation has also edged up to around 7.6%, indicating that underlying price pressures remain present.

Despite this uptick, the SBP believes inflation expectations remain anchored, supported by improved food supply conditions and relatively stable macroeconomic fundamentals compared with previous crises.

In other words, the central bank is betting that temporary supply shocks will not spiral into sustained inflation, provided the conflict does not intensify or prolong.

One of the key arguments underpinning the SBP decides that Pakistan’s macroeconomic position is considerably stronger than it was during the Russia–Ukraine shock in 2022.

Several indicators support this claim:

• Foreign exchange reserves have risen to $16.3 billion, supported by ongoing FX purchases by the central bank.
• The current account deficit remains contained, with a surplus recorded in January and the full-year deficit projected between 0–1% of GDP.
• Large-scale manufacturing has posted cumulative growth of 4.8% during 1HFY26.
• Private sector credit has expanded significantly, reflecting improving business activity.

These factors have given policymakers the confidence that the economy has sufficient buffers to absorb external shocks, at least in the short term.

The MPC’s decision also reflects a delicate trade-off between protecting economic recovery and containing inflation.

Pakistan’s economy is currently projected to grow between 3.75% and 4.75% in FY26, supported by improvements in manufacturing, agriculture, and services. High-frequency indicators, such as auto sales, cement dispatches, electricity generation, and petroleum sales, point toward a gradual revival in economic activity.

Raising interest rates prematurely could risk stalling this fragile recovery, particularly when industries are already grappling with high electricity tariffs, gas prices, and global trade disruptions.

This is precisely the concern raised by many business leaders.

Many industrialists argue that the current 10.5% policy rate remains too high, especially when combined with rising energy costs and geopolitical disruptions affecting trade.

Businessmen warned that high borrowing costs will continue to discourage investment and limit export growth, particularly for manufacturing sectors already operating under significant cost pressures. However, some observers viewed the SBP’s decision more positively. 

This MPC’s decision reflects confidence in the economy’s resilience and avoids imposing additional financial strain on businesses.

Interestingly, global developments shifted dramatically just hours after the policy announcement.

Oil prices fell sharply by nearly 10% after U.S. President Donald Trump suggested that the conflict with Iran could end soon and warned Tehran against disrupting shipping through the Strait of Hormuz.

As a result, Brent crude fell to around $94 per barrel while WTI crude declined to about $91 per barrel.

In hindsight, the SBP’s decision to pause rather than react aggressively may prove strategically sound if oil prices stabilize or decline further.

The IMF Factor

Another important dimension of the policy decision is Pakistan’s ongoing program with the International Monetary Fund (IMF).

The SBP confirmed that all quantitative targets and structural benchmarks for December 2025 have been met, which strengthens Pakistan’s credibility with international lenders.

However, the IMF has consistently emphasized the need to maintain tight monetary conditions until inflation is firmly under control.

By keeping rates unchanged, the SBP appears to be walking a fine line between supporting growth and maintaining program discipline.

Instead of reacting immediately to geopolitical shocks, the central bank has opted to wait for clearer data on oil prices, inflation trends, and global trade conditions before making its next move.

This approach has both advantages and risks. If oil prices remain volatile and inflation accelerates due to higher fuel costs, the SBP may be forced to tighten policy later in the year.

However, if geopolitical tensions ease and energy prices stabilize, the current stance could allow economic recovery to continue without unnecessary monetary tightening.

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