- Tight fiscal, monetary discipline and currency stability expected to push inflation down to 4.4pc
Continued tight monetary and fiscal policies amid stable currency are expected to moderate inflation further in FY26. Analysts expect inflation to remain at 4.4% in FY26, broadly in line with expectations, driven by a modest increase in the heavily weighted Food and Housing indices amid subdued International commodity prices. PKR is expected to remain stable due to improved external account position driven by elevated remittances and rising exports aided by structural reforms.
Inflation to ease further in FY26
Persistent tight monetary and fiscal stances, alongside currency stability, are expected to further ease inflation from the FY25 level of 4.5%. This disinflationary trend would create room for the State Bank of Pakistan (SBP) to continue with monetary easing, as headline inflation is projected to undershoot the medium-term target range of 5 to 7%.
Analysts forecast inflation to average 4.4% in FY26, 2.6% lower than the earlier projections, driven by a modest increase in the heavily weighted Food and Housing indices amid subdued Int’l commodity prices. This reinforces the outlook for a single-digit policy rate during CY25, with the rates expected to bottom at 9.5%. Despite the downward revision in inflation expectations, we maintain our policy rate assumption due to prevailing uncertainty around trade tariffs and weaker than anticipated external inflows.
Heavy weights to anchor inflation
Food prices are likely to stay moderate, except for sugar, supported by favorable weather, improved water availability, and a more efficient supply chain, aided by lower financing costs.
The Housing index is also expected to ease further in FY26, reflecting limited adjustments in electricity and gas tariffs, along with a decline in liquefied hydrocarbon prices.
Similarly, the Clothing and Footwear index is projected to moderate due to improved domestic cotton availability and stable energy costs. However, the Transport index is expected to rise in FY26, unlike the decline seen in FY25, due to the assumed gradual increase in Petroleum Development Levy (PDL) to PKR95.5/ liter on motor spirit and high-speed diesel.
Food prices to rise but at a slower pace
Analysts foresee food prices to rise in FY26, albeit at a moderate pace, driven by stable wheat prices and a significant decline in the prices of key vegetables such as onions, potatoes, and tomatoes during the Rabi season.
Despite a drop in wheat output for FY25, analysts anticipate prices to remain largely stable throughout the year, supported by adequate buffer stocks.
The moderation in prices of major crops has shifted farmers’ focus toward minor crops, which is likely to reduce the frequency of supply shocks in vegetable markets.
Furthermore, the availability of cheaper animal feed is expected to keep the prices of meat, poultry, eggs, and milk in check.
Housing index to remain muted on lower electricity and gas adjustments
Housing index is expected to moderate further in FY26 due to subdued increase in electricity prices and absence of large adjustments, unlike past, in gas prices. These factors along with declining prices of Liquefied Hydrocarbons driven by lower oil prices would help to ease Housing index further.
Electricity prices are expected to remain low on year on year basis due to reduction in base tariff and continuation of PDL based subsidy.
Rupee to remain stable
Pak Rupee is expected to remain stable due to improved external account position driven by higher remittances and rising exports amid tight monetary and fiscal policies aided by focus on structural reforms.
Stability in the PKR is critical to keep the inflation low at current levels. Analysts foresee PKR to witness erosion in value at 4%, slightly higher than inflation differential due to tariff rationalization adopted in recent budget.
International oil price
According to Reuters, oil prices edged up slightly on Friday, recovering from a midday drop into negative territory following a report that OPEC plus was planning to hike production in August, but tumbled about 12% in the week in their biggest drop since March 2023.
Brent crude futures settled at US$67.77 a barrel and US West Texas Intermediate crude (WTI) finished at US$65.52 a barrel.
Four delegates from OPEC Plus, which includes allies of the Organization of the Petroleum Exporting Countries, said the group was set to boost production by 411,000 barrels per day in August, following a similar size output increase already planned for July.
“The report about an OPEC increase came out and prices cratered,” said Phil Flynn, senior market analyst with Price Futures Group, about the midday slide.
Crude prices were already headed for a 12% decline for the week following the ceasefire between Israel and Iran.
During the 12-day war that started after Israel targeted Iran’s nuclear facilities on June 13, Brent prices rose briefly to above US$80 a barrel before slumping to US$67 a barrel after US President Donald Trump announced an Iran-Israel ceasefire.
“The market has almost entirely shrugged off the geopolitical risk premiums from almost a week ago as we return to a fundamentals driven market,” said Rystad analyst Janiv Shah.