The Monetary Policy Committee decided to keep the policy rate unchanged at 10.5 percent today, noting the macroeconomic outlook has become uncertain following the outbreak of the Middle East war.
The Committee highlighted that the conflict has sharply increased global fuel, freight, and insurance costs while disrupting cross-border trade and travel, with the conflict’s intensity and duration determining its impact on the domestic economy.
Macroeconomic fundamentals, including inflation, foreign exchange reserves, and fiscal buffers, remain stronger than during the Russia-Ukraine war in 2022, but the MPC observed that risks to the domestic economy have increased significantly.
Since the last meeting, inflation rose to 5.8 percent in January and 7 percent in February, the current account recorded a surplus, FX reserves grew to $16.3 billion, and LSM expanded by 0.4 percent.
The MPC stressed the high uncertainty around international commodity prices and supply chains, reaffirmed its commitment to maintaining price stability, and urged rapid structural reforms to ensure sustainable and resilient economic growth in Pakistan.
Real Sector
The current account posted a $121 million surplus in January 2026, limiting the July–January deficit to $1.1 billion, while imports declined and exports and remittances stabilized.
Workers’ remittances continued to finance a large portion of the trade deficit, while net official outflows occurred in January and foreign investment inflows rose slightly.
SBP’s FX purchases helped increase reserves, and timely realization of planned official inflows is necessary to reach a targeted $18 billion in reserves by June 2026.
The MPC noted that the ongoing Middle East conflict creates challenges, but the current account deficit is likely to remain within 0–1 percent of GDP for FY26.
Fiscal Sector
Fiscal operations showed continued consolidation, with the overall balance posting a surplus and the primary surplus remaining close to last year, driven by contained expenditures and lower interest payments.
Tax collection grew 10.6 percent during July–February FY26, remaining below the pace required to achieve the annual target, highlighting the need for stronger revenue mobilization.
The Committee emphasized the importance of fiscal consolidation, base-broadening measures, and structural reforms to ensure macroeconomic stability and sustainable economic growth in the medium term.
Money and Credit
Broad money (M2) growth slowed to 16.0 percent by February 20 due to reduced net budgetary borrowing, while net foreign assets contributed positively to M2 growth.
Lower budgetary borrowing and liquidity from the CRR reduction created space for private sector credit expansion, which increased by Rs790 billion up to February 20.
Credit growth was particularly strong for textiles, wholesale and retail trade, and chemicals, while consumer financing also rose, and currency in circulation increased relative to deposits.
Inflation
Headline inflation rose to 7.0 percent y/y in February, reflecting food and energy price adjustments and rationalization of electricity fixed charges, while core inflation reached approximately 7.6 percent.
The MPC noted that improved food supply and favourable agriculture prospects may partially offset higher domestic energy prices, helping to contain second-round inflationary effects.
Anchored inflation expectations and a stable environment are expected to limit further impact from fuel price increases, but risks remain from geopolitical developments, volatile food prices, and energy price adjustments.
On balance, the Committee projected that inflation is likely to stay above 7 percent for the remainder of FY26 and into FY27, reflecting evolving domestic and global conditions.
