KARACHI: Escalating global energy prices amid ongoing Middle East tensions are likely to pose significant risks to Pakistan’s external sector and inflation trajectory, according to the latest minutes of the Monetary Policy Committee (MPC) released by the State Bank of Pakistan.
The central bank noted that since the previous MPC meeting, international oil and LNG prices have surged by approximately 28.1% and 38%, respectively (as of March 6, 2026), driven by supply concerns and disruptions in key shipping routes. This sharp increase has led to a deterioration in Pakistan’s Terms of Trade (ToT).
Earlier this month, the MPC decided to keep the benchmark policy rate unchanged at 10.5%, in line with market expectations, as policymakers weighed the inflationary risks stemming from rising global energy costs and geopolitical uncertainty.
The SBP highlighted that ongoing developments in the Middle East could impact Pakistan’s external sector through multiple channels. Higher oil prices are expected to inflate the energy import bill, while increased freight costs may widen the services account deficit. Additionally, exports could face pressure due to disruptions in regional trade routes.
Despite these challenges, the central bank expects workers’ remittances to remain resilient during FY26, supported by seasonal inflows, particularly around Eid.
The SBP maintained that, under its baseline scenario, the current account deficit is likely to remain within the projected range of 0–1% of GDP for FY26. With the anticipated realization of official inflows, foreign exchange reserves are projected to reach $18 billion by June 2026.
On the inflation front, the MPC minutes indicated that price pressures may rise faster than previously anticipated, largely due to increased global energy prices, higher freight and insurance costs, and the low base effect of electricity tariffs. However, improved supply conditions for essential food items and better agricultural output during the Rabi season may provide some relief.
The central bank expects inflation to remain above 7% for the remainder of FY26, although the outlook remains highly uncertain due to volatile global commodity prices, potential adjustments in domestic energy tariffs, and evolving geopolitical developments.
The MPC’s decision to hold the policy rate steady was supported by a majority of eight out of ten members, while two members voted in favour of a 50 basis points increase, reflecting concerns over persistent inflationary risks.
Story by Ali Ahmed
