10% inflation splits rate call predictions

Growth Securities expects 50-100bps hike, AKD sees a hold as reserves, remittances strengthen

KARACHI:

Pakistan's headline inflation is expected to rise to 10% in October 2026, driven by higher electricity charges, petrol prices and food costs, while persistent inflationary pressures could prompt the State Bank of Pakistan (SBP) to raise its policy rate by 50-100 basis points at its October 26 meeting, according to a Growth Securities report authored by Nasheed Malik, which projects the National Consumer Price Index (NCPI) increasing by 1.5% month-on-month (MoM), compared with 6.2% year-on-year (YoY) and 1.7% MoM in October 2025.

Average inflation during the first four months of FY27 is expected to reach 10.2%, compared with 4.8% in the corresponding period of FY26, and the October projection is above the government's expected average of 8.9% for FY27, the report said.

The transport index is expected to rise by 0.15% to 0.20% MoM following a 5.5% monthly increase in the average petrol price to Rs396.06 per litre, up 48.3% YoY, while the housing index is also expected to increase on a monthly basis due to higher electricity charges and liquefied petroleum gas (LPG) prices, which are projected to rise by 6.2% MoM.

The food index is forecast to increase by around 0.25% to 0.30% MoM, mainly due to price increases of 10% in wheat, 14% in chicken, 11% in pulse gram and 5% in garlic, according to the report.

Malik said real interest rates returned to positive territory in June 2026 and are projected to reach 1.5% in October, compared with 1.2% in September, and he expects inflation to remain in the 9% to 10% range until March 2027 if average fuel prices stay between Rs390 and Rs400 per litre, with average inflation for FY27 projected at 9% to 9.5%. He expects the Monetary Policy Committee (MPC) to raise the policy rate by 50-100 basis points at its October 26, 2026 meeting if fuel prices remain elevated.

A separate assessment by AKD Securities Director Research Mohammed Awais Ashraf holds that Pakistan's improved external and fiscal position is strengthening the case for holding rates steady, with robust remittances, improving exports, record-high foreign exchange reserves and a contained current account position improving macroeconomic buffers and giving the SBP room to hold at its upcoming MPC meeting.

The successful issuance of a $3 billion Eurobond at record-low spreads had further supported external stability, and Ashraf wrote that a slowdown in large-scale manufacturing (LSM), coupled with a decline in fuel prices since the previous MPC meeting, was also expected to support a status quo decision.

He raised his FY27 inflation forecast to 9.1% from an earlier projection, reflecting a higher oil-price assumption of $96.3 per barrel compared with $72.5 previously, maintained the FY28 forecast at 6%, and pushed back the assumed start of monetary easing to April 2027 from October 2026, citing prolonged higher oil prices and a larger-than-expected rise in wheat prices.

Dubai crude declined 15.5% since the previous MPC meeting, from $127 to $107 per barrel, reflecting improved flows through the Strait of Hormuz and the end of seasonal refinery maintenance, though renewed Houthi attacks on Saudi infrastructure, Red Sea disruption and declining US oil inventories continue to underpin prices.

Real interest rates are expected to average 3.4% over the next 12 months, assuming normal rupee depreciation and gradual normalisation of oil prices through February 2028, with fiscal discipline improving further.