KARACHI: The State Bank of Pakistan (SBP) has decided to keep the key policy rate unchanged at 10.5 per cent.
The decision was taken at the SBP’s Monetary Policy Committee (MPC) meeting held on Monday, March 9, 2026.
The MPC noted that the Middle East conflict 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.
Given the evolving nature of events, the MPC observed that the intensity and duration of the conflict will both be important determinants of the impact on the domestic economy.
In this regard, the Committee acknowledged the important role of prudent monetary and fiscal policies in increasing the economy’s resilience to shocks. The MPC noted that macroeconomic fundamentals, especially in terms of inflation and the country’s FX and fiscal buffers, are better compared to the time of the start of the Russia-Ukraine war in early 2022.
The MPC’s initial assessment of the evolving geopolitical situation indicates that the outlook for key macroeconomic variables for FY 26 is within the earlier projected ranges. However, risks for the macroeconomic outlook have increased significantly.
In addition to the ongoing geopolitical events, the MPC noted the following key developments since its last meeting. First, inflation rose to 5.8 per cent in January and further to 7 per cent in February 2026. Second, the current account recorded a surplus in January, which, amidst weak official inflows, led to continued interbank FX purchases by the SBP and the buildup in FX reserves to $16.3 billion as of February 27.
Third, large-scale manufacturing (LSM) grew by 0.4 per cent y/y in December 2025, with cumulative growth reaching 4.8 per cent in July-December FY26. Fourth, consumers’ inflation expectations and confidence improved, while those of businesses remained broadly stable in February.
Fifth, FBR tax collection remained below target in both January and February, further widening the cumulative shortfall during July-February FY26. Lastly, the US administration announced the imposition of uniform global tariffs, which may have noticeable implications for global trade.
The Committee noted the high degree of uncertainty in the outlook for international commodity prices and supply-chain disruptions in the backdrop of the war in the Middle East. In this context, the MPC deemed today’s decision as appropriate.
Economic activity continued to strengthen, with high-frequency indicators – such as auto sales, domestic cement dispatches, electricity generation, and POL sales (excluding furnace oil) – recording higher growth during July-January FY26.
Recent policy and regulatory measures – including the reduction in the Cash Reserve Requirement and in markup rates on loans to exporters by banks, and downward adjustment in energy tariffs for the industrial sector – have reinforced manufacturing prospects. In the agriculture sector, the wheat sowing target has largely been met, and the input conditions remain favourable.
External Sector:
The current account posted a surplus of $121 million in January 2026, reducing the deficit to $1.1 billion in July–January FY26. Imports declined in January, whereas exports and workers’ remittances largely stabilised at December levels.
Workers’ remittances continued to finance a significant part of the trade deficit. In the financial account, net official outflows were recorded in January, whereas foreign investment inflows inched up slightly. SBP’s FX purchases continued to help build up SBP’s FX reserves. Going forward, 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 – 1 per cent of GDP in FY26. In this backdrop, the Committee emphasised the timely realisation of planned official inflows to achieve the targeted buildup in SBP’s FX reserves to $18 billion by June 2026.
Fiscal Sector:
The 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, the tax collection remained moderate, rising 10.6 per cent during July–February FY26 – well below the pace required to meet the annual target. In this context, the Committee emphasised the importance of continuing the fiscal consolidation via base-broadening measures and undertaking structural reforms to ensure macroeconomic stability and sustainable economic growth.
Money and Credit:
Since the last MPC meeting, broad money (M2) growth decreased to 16.0 per cent as of February 20, due to a sharp reduction in the net budgetary borrowing from the banking system, whereas NFA’s contribution to M2 growth increased.
The Committee noted that lower budgetary borrowing, along with liquidity generated through the recent CRR reduction, has created space for greater private sector lending. Consequently, PSC expanded by Rs790 billion up to February 20, reflecting growth in both working capital and fixed investment.
Credit especially increased to textiles, wholesale and retail trade, and chemicals, whereas consumer financing continued to increase as well. Currency in circulation increased, whereas deposits recorded a decline, leading to an increase in the currency to deposit ratio and a rise in reserve money growth.
Inflation:
As expected, headline inflation rose to 7.0 per cent y/y in February, largely due to phasing out of the low base effect from food and energy prices, along with rationalisation of fixed charges on households’ electricity bills.
Meanwhile, core inflation increased to around 7.6 per cent. The MPC assessed that the impact of higher expected domestic energy prices is likely to be partially offset by recent favourable movement in food prices amidst improved supply of key items and better prospects of agricultural produce.
The MPC also observed that the ongoing anchored inflation expectations and stable inflation environment are likely to somewhat limit the second-round impact of the increase in domestic fuel prices.
At the same time, the MPC noted that this assessment is subject to significant risks, particularly those from the evolving geopolitical situation, as well as from volatile food prices and unanticipated adjustments in domestic administered energy prices. On balance, given these developments and risks, the Committee assessed that inflation may remain above 7 per cent in the remaining months of FY26 and into FY27.
