Pakistan’s central bank may keep rates steady as oil prices rise, pushing inflation and rupee risks higher despite earlier cuts.
Pakistan’s monetary policy is entering a more cautious phase. Market analysts broadly expect the State Bank of Pakistan (SBP) to keep its policy rate unchanged at 10.5%, even after a long cycle of rate cuts since mid-2024. The main reason is simple: global oil and gas prices are rising again, and Pakistan’s import-heavy energy bill can quickly turn into higher inflation and a weaker rupee. With geopolitical tensions increasing and shipping routes facing new risks, the central bank has limited space to ease policy further in the near term.
Why SBP Is Likely to Hold at 10.5%
Analysts expect SBP to keep the policy rate steady because the balance of risks has shifted. Since mid-2024, the central bank has already cut the key rate by a cumulative 11.5 percentage points, down from a peak of 22%. That easing helped support domestic demand, but it also reduced the buffer SBP has against new price shocks. When uncertainty rises, central banks usually prefer to pause rather than overreact.
SBP has also repeated that it wants to maintain a positive real interest rate to anchor inflation expectations, especially under the country’s IMF programme. If inflation starts trending higher again, holding rates becomes the safer option. In practice, a “hold” decision signals that SBP is watching incoming inflation data, external accounts, and currency conditions before it considers any further cuts.
Oil Shock and Strait of Hormuz Risks
The biggest near-term pressure comes from energy markets. Rising tensions in the Middle East have increased the risk of disruptions to shipping through the Strait of Hormuz, a critical global route for oil and LNG cargoes. When traders price in supply risks, oil and gas benchmarks often move up quickly. For Pakistan, that matters because higher energy prices pass through the economy via transport, electricity costs, and overall business expenses.
Pakistan’s heavy reliance on imported fuel makes it vulnerable. Even if local demand stays stable, a jump in global prices can widen the import bill. This creates pressure on the trade deficit and raises the cost of doing business, which can eventually show up in consumer prices. That’s why energy prices often dictate the direction of monetary policy in Pakistan more than any other single external variable.
Inflation, Rupee Pressure, and Trade Deficit
Inflation has already been showing signs of turning. It rose to 7.0% in February after 5.8% in January. Analysts still expect inflation to average around 6% to 8% in the coming months, but they warn that a sustained rise in oil prices could push it higher. One market estimate suggests that every $10 per barrel increase in crude prices can add roughly 0.5 percentage points to inflation, depending on how much of the shock is passed through.
At the same time, higher oil prices can weaken the rupee by raising dollar demand for imports. A weaker rupee then feeds back into inflation through more expensive imported goods and inputs. This loop—oil up, deficit wider, rupee under pressure, inflation higher—can force policymakers to stay cautious. If the trade deficit widens alongside stronger growth and higher imports, the case for keeping rates steady becomes even stronger.
What to Watch After the Policy Meeting
Even if SBP holds the rate now, the next steps will depend on three signals. First, watch global energy prices and any signs of shipping disruptions. Second, track monthly inflation prints to see whether the recent rise is temporary or becoming a trend. Third, monitor the rupee and the external account, because currency stability is critical when imported inflation risks are high.
SBP Governor Jameel Ahmad has emphasised medium-term price stability, while the economy is projected to grow in FY26, supported by domestic demand and earlier easing. If inflation stays within the central bank’s target band for most of the year and external pressures ease, rate cuts could return later. But if oil remains high and the rupee faces sustained pressure, SBP may need to keep policy tight for longer than markets initially expected.
