By Moaaz Manzoor

Pakistan’s inflation outlook for FY27 may be lower than earlier expected, but the State Bank of Pakistan is still likely to keep the policy rate unchanged in July due to risks from a fragile ceasefire and the monsoon season, according to a research report by Topline Securities.

The brokerage house, in its report titled “Pakistan Economy | Inflation”, available with Wealth Pakistan, revised down its FY27 average inflation estimate by around 100 basis points to 7.0-7.5%, compared with its earlier forecast of 8.0-8.5%.

The report attributed the downward revision mainly to lower international oil prices following the likely resolution of war-related tensions. It said Brent crude oil prices had declined by 39% to US$71.8 per barrel from a peak of US$118.35 per barrel recorded on March 31, 2026.

According to the report, month-on-month inflation in FY27 is expected to average 0.54%, compared with the last two-year and five-year average monthly growth of 0.58% and 1.20%, respectively.

Topline’s inflation assumptions are based on Brent crude oil prices remaining in the range of US$70-75 per barrel and currency depreciation of 5-6%. The report also assumes a 15% increase in gas prices in August 2026 and a 5% decline in January 2027, based on the semiannual gas price adjustment pattern.

On electricity, the report assumes an increase in line with rupee depreciation. For the housing, water, electricity and gas category, it projects an average increase of 0.55% month-on-month. Rent has been adjusted on a quarterly basis at 1.75% quarter-on-quarter, equivalent to 7% annually, in line with historical trends.

Food inflation is expected to average 0.67% month-on-month in FY27. The report expects Eid and Ramadan months to record increases of 1-2% month-on-month, while remaining months are expected to see an increase of around 0.5% month-on-month.

The report said food inflation is likely to behave more normally as the impact of heavy-weight items such as wheat is already reflected in the base calculation. It noted that wheat prices were already up by more than 60% year-on-year by June 2026.

For vegetables and fruits, the report linked price behaviour to demand and supply conditions, noting that supply is currently outpacing demand due to the closure of the Afghan border and elevated freight costs for Middle East exports.

On transport inflation, Topline said the calculation of fuel price impact in monthly inflation is now based on a day-weighted average instead of the earlier cut-off formula of the 7th to 10th of the month. Based on this method, the fuel cost contribution to July 2026 inflation is expected to decline by around 14% month-on-month. For subsequent months, it assumes fuel prices will increase by 0.57% month-on-month, in line with rupee depreciation.

Despite a lower inflation path, the report expects the July 2026 Monetary Policy Committee meeting to maintain the status quo. It said there is room for a rate cut in July based on the inflation pathway for the next 12 months, but the central bank may prefer to wait because the fragile ceasefire continues to pose risks of intermittent oil price shocks, while excessive monsoon rainfall could affect food crop production and create upside risks to food inflation.

The report noted that the government has projected FY27 inflation at 8.2%, while the International Monetary Fund has forecast inflation at 8.4%. The SBP is expected to update its inflation outlook in the upcoming Monetary Policy Committee meeting on July 27, 2026.

Topline expects the first rate cut of 2026 in September, with a 100-basis-point reduction taking the policy rate to 10.5%. It further expects the policy rate to decline to 10.0% by the end of FY27, implying total easing of 150 basis points.

The report identified key risks to its forecast, including changes in oil prices outside the assumed US$70-75 per barrel range, deviations from the projected 5-6% rupee depreciation, and excessive rainfall that could affect the inflation outlook.

Credit: INP-WealthPk