Holding the Line

In a moment of geopolitical upheaval and economic uncertainty, the State Bank of Pakistan’s decision to hold the policy rate at 10.5 percent reflects a familiar instinct: caution. With global energy markets roiled by the escalating conflict involving Iran and disruptions to the Strait of Hormuz, a channel responsible for roughly a quarter of the world’s oil shipments, the central bank has chosen not to rush into another adjustment. For now, that restraint appears justified.

The Monetary Policy Committee’s statement made clear that the macroeconomic outlook has become “quite uncertain” in the wake of the Middle East war. The conflict has already pushed global fuel prices higher and increased freight and insurance costs, while also unsettling trade and travel routes. For a country like Pakistan, which imports the bulk of its energy needs, these developments quickly translate into domestic inflationary pressures.

Those pressures are already visible. Inflation, which had cooled significantly from the multi-decade highs of 2023, ticked upward again in recent months, reaching 5.8 percent in January and 7 percent in February. Meanwhile, the government last week raised petrol and diesel prices by Rs55 per litre, the largest single increase on record, as the first direct economic shocks from the regional conflict reached Pakistani consumers.

Against this backdrop, the State Bank’s decision to maintain the policy rate suggests a desire to avoid sudden shifts in an already volatile environment. After all, the central bank has spent the past year gradually easing monetary conditions, cutting rates by a cumulative 1,150 basis points since mid-2024 as inflation receded and macroeconomic indicators stabilized. Reversing course abruptly could undermine that carefully managed trajectory.

Nor is caution new for the SBP. In previous policy meetings, it resisted strong lobbying from industrialists eager for further rate cuts, arguing that premature easing could risk overheating the economy. In retrospect, that restraint appears prudent. Pakistan’s economic recovery remains fragile, and without deeper structural reforms, from tax collection to productivity improvements, monetary policy alone cannot sustain long-term growth.

Still, prudence must not slide into paralysis. The geopolitical crisis unfolding in the Gulf is far from settled. Washington has signaled the conflict could stretch for months, and leaders in the G7 are already discussing coordinated releases of strategic oil reserves to stabilize markets. If energy prices continue to surge or supply disruptions intensify, Pakistan’s economic outlook could deteriorate rapidly.

That possibility demands preparation. The State Bank would be wise to use this pause not simply to observe events but to plan for multiple scenarios. If global markets stabilize, the current stance may remain appropriate. But if the crisis deepens, or if Pakistan itself becomes more directly affected, the central bank must be ready to act quickly, even through emergency policy meetings if necessary.

For now, the SBP has chosen stability over haste. In uncertain times, that is a defensible choice. But the months ahead may test how quickly caution can give way to decisive action.