Pakistan Central Bank Halts Rate Cuts as Middle East War Sends Oil Prices Surging

KARACHI, Pakistan — On a humid March afternoon in Pakistan’s commercial capital, fuel station attendants climbed their ladders to change the price boards yet again. By the time they climbed down, petrol was about 20% more expensive than a week earlier. Across town, inside the State Bank of Pakistan’s domed headquarters, policymakers were making a different kind of move by standing still.

Meeting on March 9, the central bank’s Monetary Policy Committee kept the benchmark policy rate unchanged at 10.5%, halting an aggressive easing cycle that had more than halved borrowing costs from a crisis peak of 22% in mid-2023.

In a brief statement, the committee said the country’s economic outlook had turned “quite uncertain following [the] outbreak of the war in the Middle East,” warning of a “sharp increase in global fuel prices as well as freight and insurance costs, while also affecting cross-border trade and travel.”

The decision, taken in Karachi but shaped by events near the Strait of Hormuz, underscored how quickly a distant conflict has fed into Pakistan’s inflation and currency calculations just as its economy was beginning to recover from years of turmoil.

Inflation turns back up

After months of steady declines, consumer price pressures have started to climb again.

Headline inflation eased to 5.6% year-on-year in December 2025, close to the State Bank’s medium-term target range of 5% to 7%. It edged up to 5.8% in January and then jumped to 7.0% in February 2026, the highest rate in a year and a half. Core inflation, which strips out volatile food and energy prices, was about 7.6% in February.

The central bank said it now expects inflation to remain above its 5% to 7% target band for the rest of the current fiscal year and into the next, even as it forecast real gross domestic product growth of between 3.75% and 4.75% in the year ending June 2026.

Despite the recent uptick in prices, the bank argued that the current policy stance keeps the “real” interest rate — adjusted for expected inflation — “adequately positive” to bring inflation back to target over the medium term.

“Given the evolving risks,” the committee said, maintaining the rate at 10.5% would help anchor expectations while allowing the recovery to continue “without stoking renewed inflationary pressures.”

From crisis peak to cautious pause

The hold marks a pause in one of the steepest monetary reversals in Pakistan’s history.

Between 2021 and 2023, as the country grappled with surging global commodity prices, a sliding currency and repeated delays in securing an International Monetary Fund bailout, the State Bank raised its policy rate to a record 22%. That contributed to a sharp slowdown in growth and a spike in debt servicing costs but was seen by officials as necessary to curb runaway inflation and stem capital flight.

As inflation started to recede from highs above 30% and the current account deficit narrowed, the bank began cutting. From mid-2024 through the end of 2025, successive meetings brought the policy rate down by a cumulative 11.5 percentage points. A 50 basis point cut on Dec. 15, 2025, took the rate to 10.5%.

The first sign of a more cautious stance came on Jan. 26, 2026, when the committee opted to hold the rate at 10.5%, flagging “stubbornly high” core inflation and a widening trade deficit. At that point, the war in Iran had not yet begun; the March meeting was the first to factor in the new geopolitical shock.

A war spills into Pakistan’s economy

The conflict at the heart of the central bank’s concerns erupted at the end of February, when U.S. and Israeli forces launched strikes on Iranian targets, including senior leadership and military infrastructure. Iran responded with missile and drone attacks on U.S. assets and Gulf energy facilities and by impeding commercial shipping through the Strait of Hormuz, a chokepoint through which a significant share of the world’s seaborne oil flows.

Tanker traffic through the strait fell sharply in early March as vessels diverted or waited for naval escorts. Benchmark Brent crude prices spiked, briefly touching around $119 a barrel and then trading in a range of roughly $100 to $115 as the crisis unfolded. War-risk insurance premiums and freight costs climbed rapidly as shipowners sought compensation for the danger.

Few economies are as exposed to those disruptions as Pakistan. The country imports roughly 90% of its oil from Gulf producers, with most shipments transiting near or through Hormuz. Almost all of its external trade moves by sea.

On March 9, the same day the Monetary Policy Committee met, the Pakistan Navy announced it had launched Operation “Muhafiz-ul-Bahr” — Protector of the Sea — to secure the country’s sea lines of communication and safeguard energy imports amid the regional conflict. The government has worked with Saudi Arabia to reroute at least some crude shipments via the Red Sea port of Yanbu to reduce dependence on the threatened strait.

These measures have not insulated Pakistani consumers from the global price shock. The government raised domestic fuel prices by around one-fifth in early March, explicitly citing the jump in international oil benchmarks and higher import costs.

Stronger buffers — but limited room for error

The State Bank has argued that Pakistan is better placed to weather this shock than it was when Russia’s invasion of Ukraine in 2022 roiled global commodity markets.

At that time, the country’s foreign exchange reserves had dwindled to precarious levels, inflation was already in double digits, and politically popular fuel subsidies widened fiscal and external imbalances, complicating talks with the IMF.

Today, the picture is somewhat different. Headline inflation is in single digits, albeit rising. The current account recorded a $121 million surplus in January, limiting the deficit in the first seven months of the fiscal year to $1.1 billion. The central bank’s own reserves stood at $16.3 billion on Feb. 27, a significant improvement from lows below $4 billion in 2023. Officials are targeting about $18 billion in reserves by June, roughly three months of import coverage.

The current account deficit is projected to remain within 0% to 1% of GDP this year, assuming oil prices and external financing conditions do not deteriorate further.

“Pakistan has stronger buffers and more prudent policies in place compared to the start of the Russia-Ukraine conflict,” the bank said, while cautioning that the “intensity and duration” of the new war would determine the ultimate impact on the economy.

IMF shadow and political pressure

Behind the central bank’s deliberations is an ongoing extended arrangement with the IMF. Pakistan is currently in a 37-month, $7 billion Extended Fund Facility approved in September 2024, as well as a 28-month Resilience and Sustainability Facility approved in 2025.

Under those programs, the government has committed to fiscal consolidation, including higher energy tariffs and broader tax collection, and to rebuilding reserves. IMF staff have estimated Pakistan’s gross external financing needs in the current fiscal year at close to $20 billion, a figure that leaves little room for policy missteps if global markets tighten.

In its March statement, the State Bank emphasized that its outlook depends on the “timely realization of planned official inflows” and on maintaining the reform path. Cutting interest rates into a fresh oil shock, while still relying on multilateral and bilateral lenders to roll over debt and provide new funds, could have raised questions among creditors about Pakistan’s commitment to restraining inflation and defending the currency.

At home, the calculus is different. Businesses that saw borrowing costs plunge as the policy rate fell from 22% to 10.5% had hoped for further relief this year. Small and medium-sized enterprises, in particular, face a squeeze from higher energy bills and still-elevated lending rates.

Households are under strain as well. Years of high inflation and slow growth pushed Pakistan’s poverty rate from about 22% in 2018–19 to nearly 29% in 2024–25, according to official figures cited by international lenders. Fuel and electricity price hikes, which account for a larger share of poorer households’ budgets, risk reversing some of the modest gains made as inflation cooled last year.

Civil society groups and economic think tanks have warned that prolonged high real interest rates can discourage investment and job creation, even as they help stabilize prices. The State Bank has countered that an uncontrolled surge in inflation and a renewed balance-of-payments crisis would be more damaging.

Markets and what comes next

Financial markets have been volatile. In the jittery week before the March 9 decision, Pakistan’s main Karachi Stock Exchange 100 index suffered one of its steepest one-day falls on record, with investors dumping shares amid fears of a protracted Gulf conflict and uncertainty over how policymakers would respond.

Analysts say the central bank’s decision to hold was widely expected once oil prices spiked, but they differ on how long the pause will last.

If the Middle East conflict eases and energy prices retreat, and if domestic inflation stabilizes, many expect the State Bank to resume gradual cuts later in 2026 to support growth. If the war drags on and oil remains around or above current levels, the bank may be forced to keep policy tight for longer, even as public and political pressure for relief grows.

For now, the institution is betting that defending hard-won stability outweighs the calls for cheaper credit. Its pause at 10.5% reflects an uneasy reality: even with stronger buffers than before, a country that imports almost all of its fuel remains tethered to events far beyond its shores, and its monetary policy will move — or stay still — accordingly.