SBP warns of price spirals

Karachi, August 11th, 2026 - The State Bank of Pakistan (SBP) emphasized in its biannual Monetary Policy Report (MRR) that evolving geopolitical events in the Middle East could cause a surge in global energy and commodity prices, exceeding initial predictions. Consequently, this could have a significant impact on the overall economic outlook, as stated in the report published on Monday by the central bank.

The MRR examined macroeconomic developments and the factors that have influenced monetary policy since the January Monetary Policy Committee (MPC) meeting. The report pointed out climate-related risks, including evolving El Nino conditions and floods, which may adversely affect the economy. Additionally, the SBP highlighted that delays in implementing structural reforms could weaken exports, hinder productivity gains, and reduce the economy's ability to sustain higher growth without sparking inflationary pressures and external account challenges.

Geopolitical developments, particularly the Middle East conflict that emerged in late February, played a substantial role in shaping the macroeconomic conditions during the review period. The outbreak of the conflict led to sharp increases in global energy prices, freight and insurance costs, as well as disruptions in supply chains, the report noted.

Despite the considerable shock, the macroeconomic outcomes in the fiscal year 2026 (FY26) remained broadly in line with the projection ranges announced following the January MPC meeting, the SBP explained.

The report acknowledged that the SBP's prudent monetary policy tightening has been effective in containing second-round effects of the energy price shock while keeping inflation expectations of stakeholders stable. Meanwhile, the government demonstrated fiscal discipline by timely raising domestic fuel prices and introducing targeted subsidies and austerity measures to conserve energy, helping moderate aggregate demand and keep demand-side pressures in check.

The report projected that inflation is expected to ease and stabilize near the upper bound of the target range towards the end of FY27. Economic growth is anticipated to pick up and remain within the range of 3.5-4.5 percent. In terms of the external account, the current account deficit is projected to remain within 0-1 percent of GDP, which will support continued foreign exchange purchases by the SBP and help achieve the FX reserves target of $20.20 billion by December 2026.

The SBP's FX reserves are expected to increase further by the end of FY27, as indicated in the report.

Moreover, the MRR also addresses multiple risks to the macroeconomic outlook, such as the updated monetary policy transmission mechanism, the central bank's reaction function when confronted with supply-side-driven inflation, the use of various inflation measures globally and within the SBP, the growing size of open market operations and their implications for monetary policy, and the use of different sentiment surveys to gauge stakeholders' expectations about different aspects of the economy.