By Moaaz Manzoor

Rising geopolitical tensions and higher oil prices may prompt the State Bank of Pakistan (SBP) to keep the policy rate unchanged at 10.5%, as uncertainty surrounding inflation, external balances, and global developments weighs on the monetary policy outlook, reports Wealth Pakistan.

Pakistan’s monetary policy outlook is increasingly being shaped by geopolitical developments and rising energy prices ahead of the upcoming Monetary Policy Committee (MPC) meeting coming Monday (March 9). According to research by Arif Habib Limited, the central bank is expected to maintain the policy rate at 10.5%, signalling caution amid a rapidly evolving global backdrop.

Speaking to Wealth Pakistan, Waqas Ghani, head of research at JS Global Capital Ltd, said, “For an import-dependent economy like ours, higher oil prices widen the trade deficit and pressure the rupee. In this uncertain environment, the State Bank is likely to hold the interest rate in the coming MPC meeting.”

The Arif Habib Limited research highlights that geopolitical tensions, particularly the US-Iran conflict, have unsettled global markets and pushed commodity prices higher.

The conflict has already lifted crude prices, with Brent rising by 18%, WTI by 21%, and Arab Light by 16%.

Higher oil prices could have significant implications for Pakistan’s external sector due to the country’s reliance on imported energy. The Arif Habib Limited research notes that every $10 per barrel increase in oil prices could widen the current account deficit by around $2 billion annually.

Inflationary pressures may also increase. The report notes that headline inflation may rise by roughly 0.4% directly, while indirect effects could be larger, pushing inflation further above the medium-term target range of 5-7%. Despite these risks, inflation trends remain relatively contained, with average CPI for 8MFY26 standing at 5.4%, slightly below 6.0% last year, while core inflation remains elevated at 7.4% year-on-year.

External sector indicators present mixed trends. Pakistan recorded a current account surplus of $121 million in January 2026, while on a cumulative basis, the 7MFY26 deficit stood at $1.07 billion, compared with a surplus of $560 million last year. Remittances may provide some support, as transfers from Gulf Cooperation Council countries account for around 50-55% of Pakistan’s total inflows, and regional tensions may encourage expatriates to increase transfers ahead of the Eid season.

Domestic economic activity remains relatively resilient. According to the Arif Habib Limited research, large-scale manufacturing output rose by 4.8% in the first six months of FY26, while GDP growth in 1QFY26 reached 3.7%, with the SBP projecting FY26 growth in the 3.25-4.25% range.

Fiscal indicators also point to relative stability. The report notes that 1HFY26 fiscal accounts posted a surplus of Rs541 billion, while the primary balance remained in surplus at Rs4 trillion, reflecting continued fiscal discipline.

Financial markets are showing cautious sentiment ahead of the policy decision. Short-term yields have increased, with three-month, six-month and 12-month cut-offs rising by 60bps, 79bps and 99bps, respectively, while longer-tenor yields also edged higher, with three-year, five-year and 10-year cut-offs rising by 11bps, 23bps and 24bps, respectively.

Market expectations strongly favour a pause in the policy rate. The Arif Habib Limited survey shows 96% of participants expect the policy rate to remain unchanged, while only 4% anticipate a 50bps cut.

The cautious outlook comes after the MPC kept the policy rate unchanged at 10.5 percent on January 26, 2026, following a 50-basis-point cut on December 15, 2025. At the time, inflation remained within the 5-7 percent target range during July-November FY26, and economic activity showed improvement, supported by high-frequency indicators, including large-scale manufacturing.