Pakistan’s central bank has decided to keep its benchmark policy rate unchanged at 10.5 percent, a move that comes at a time when global economic uncertainty is intensifying due to the ongoing conflict in the Middle East. The decision was announced after a meeting of the Monetary Policy Committee (MPC) chaired by State Bank of Pakistan Governor Jameel Ahmad. In its latest Monetary Policy Statement, the committee acknowledged that the country’s macroeconomic outlook has become increasingly uncertain as geopolitical tensions threaten to disrupt global energy markets and fuel price stability. Officials indicated that the scale of the economic impact on Pakistan will depend largely on the duration and intensity of the conflict, but early signals from global markets already point toward significant financial and inflationary pressures.
One of the most immediate concerns stems from developments in global energy markets. Oil prices have climbed sharply since the outbreak of hostilities, rising from the mid-60 dollar range per barrel to above 100 dollars, with further increases expected if the conflict continues. For Pakistan, which relies heavily on imported fuel to meet domestic energy demand, such a price surge can have widespread consequences across the economy. Higher oil prices tend to increase transportation and production costs, which in turn affect food prices, electricity tariffs, and overall consumer inflation. The situation has become more complicated after several large fuel suppliers in Gulf countries invoked force majeure clauses that allow companies to suspend contractual obligations due to extraordinary circumstances. Firms from Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar—key suppliers of petroleum products to Pakistan—have taken this step, raising concerns about possible supply disruptions that could intensify economic pressure at home.
Financial markets worldwide have reacted quickly to these developments, with bond yields rising in response to the expectation that inflation will accelerate due to higher energy costs. Investors are increasingly anticipating that central banks across major economies may tighten monetary policy in order to contain price pressures. Futures markets in Western countries have already revised their projections, suggesting that global interest rates could move higher in the coming months. In this environment, Pakistan’s decision to hold its policy rate steady has drawn attention from economists who are closely monitoring the country’s monetary strategy.
The central bank outlined several reasons for maintaining the current rate, though some analysts believe these explanations leave important questions unanswered. Inflation data is one area where observers have highlighted inconsistencies. Headline inflation rose from 5.8 percent in January to 7 percent in February, reflecting a noticeable increase in consumer prices within a short period. This upward trend contrasts with the central bank’s earlier decision in December 2025 to cut the policy rate by 50 basis points when inflation had declined only slightly—from 6.1 percent in November to 5.6 percent in December. With global fuel costs now surging, economists warn that inflation could rise further in the months ahead, potentially eroding household purchasing power and increasing the cost of living across the country.
Rising energy prices may also carry broader social implications. Analysts point out that higher fuel and commodity prices could push Pakistan’s poverty levels beyond previously estimated thresholds. According to the World Bank’s last assessment in June of the previous year, about 44.7 percent of the population—roughly 107.95 million people—was already living below the poverty line. Any sustained increase in inflation could expand this number, particularly among low-income households that are most vulnerable to changes in food and energy costs.
The central bank’s assessment of core inflation has also generated discussion. The Monetary Policy Statement indicated that core inflation had reached around 7.6 percent, but the specific source of this figure was not detailed. Data published by the Pakistan Bureau of Statistics suggests slightly different trends, showing urban core inflation declining marginally from 7.2 percent in January to 7.1 percent in February, while rural core inflation remained unchanged at 8.3 percent during the same period. These variations have prompted some economists to call for greater clarity in the data used to guide policy decisions.
External sector indicators present another mixed picture. While Pakistan recorded a current account surplus in January 2026, broader figures for the fiscal year show a deficit of approximately 1.1 billion dollars for the July to January period. At the same time, the country’s trade deficit has widened significantly, reaching 20.5 billion dollars during the first half of the fiscal year compared with 15.9 billion dollars in the same period a year earlier. The State Bank has reportedly intervened in the interbank foreign exchange market to purchase dollars and strengthen its reserves, a move aimed at stabilizing the external position as global uncertainties grow.
Industrial activity remains another area of concern. Large-scale manufacturing recorded modest year-on-year growth of just 0.4 percent by December 2025, although cumulative growth for the first half of the fiscal year was estimated at 4.8 percent. Representatives from the manufacturing sector have questioned these figures, arguing that the overall environment for industry remains challenging. They cite the closure of around 150 factories and the exit of several multinational companies as signs that the sector is under pressure. Many business groups have urged policymakers to reduce borrowing costs and lower input prices so that local manufacturers can compete more effectively with regional markets.
The Monetary Policy Statement also suggested that consumer inflation expectations and confidence improved in February, while business sentiment remained broadly stable. However, some analysts find this assessment difficult to reconcile with the simultaneous rise in inflation and the uncertainty created by global geopolitical developments. They argue that economic sentiment may be more fragile than official indicators suggest.
Fiscal performance has also played a role in the broader economic discussion. Government tax revenues increased by 10.6 percent during the July to February period of the fiscal year, but overall collections still fell short of the targets set for the year. Economists attribute this gap partly to ambitious revenue projections agreed upon between Pakistan and the International Monetary Fund under the country’s financial support program.
Some observers believe the decision to keep the policy rate unchanged may also reflect a desire to support private sector growth by maintaining relatively stable borrowing costs. Lower interest rates can encourage investment and credit activity, particularly in industries that rely on financing for expansion. However, the IMF has emphasized that Pakistan’s monetary policy should remain cautious and guided by economic data to ensure that inflation remains within the central bank’s target range.
If the Middle East conflict continues and global oil prices remain elevated, analysts warn that Pakistan may eventually have little choice but to tighten monetary policy. Estimates suggest the policy rate could rise by 150 to 300 basis points if inflation accelerates significantly. The IMF has also advised Pakistan to deepen its interbank foreign exchange market and allow greater exchange rate flexibility so that the currency can absorb external shocks more effectively. Progress in implementing these measures has been gradual, highlighting the broader structural challenges facing the country’s economic management as it navigates a volatile global environment.
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