SBP faces dilemma as supply-side pressures clash with need to protect 3.89% GDP growth
KARACHI:
Brokerage houses have suggested ahead of the State Bank of Pakistan’s (SBP) upcoming Monetary Policy Committee (MPC) meeting that a policy rate hike would be counterproductive and lead to overcorrection.
In its latest preview, Arif Habib Limited (AHL) argued that the case for holding the policy rate at 10.5% still holds weight, expecting the central bank to maintain it in April 2026. The brokerage maintained that while global conditions remain unsettled, particularly due to ongoing US-Iran tensions, the domestic macroeconomic framework does not yet justify further tightening.
“The world is negotiating peace amid uncertainty; therefore, policy must lean towards discipline over impulse,” AHL said, adding that oil price movements, which saw Arab Light crude swing between $135 per barrel and as low as $77, reflect volatility rather than a sustained inflationary trend.
The brokerage noted that although external shocks have filtered into domestic prices, particularly through transport inflation, which rose 12% month-on-month in March and is expected to climb further in April, broader inflation dynamics remain contained. Headline inflation clocked in at 7.3% year-on-year in March, with the FY26 average at 5.67%, remaining within what it termed an “anchored range.”
Arif Habib projected that any uptick towards double-digit inflation in the final quarter of FY26 would largely be a base-effect phenomenon driven by energy price pass-through, rather than demand-side overheating. It forecast average inflation at 7.1% in FY26 and 8.5% in FY27, with core inflation holding near 8%.
“Responding to such temporary pressures with policy tightening risks overcorrection,” the brokerage said, emphasising that the current inflation pulse is supply-driven rather than demand-led. It warned that premature tightening could derail the fragile economic recovery, with GDP growth recorded at 3.89% in the second quarter of FY26 and downside risks persisting amid geopolitical spillovers.”With 3Q expected to be impacted by the conflict spillover, risks to growth persist, making a rate hike counterproductive at this stage,” AHL noted.
On the external front, the brokerage highlighted improving resilience, citing a $1.07 billion current account surplus in March, the highest in a year, supported by robust remittances and a narrowing trade deficit. Despite elevated oil prices, it expects the FY26 current account deficit to remain manageable at about $1.6 billion.
Foreign exchange buffers have also strengthened, with reserves standing at $15.1 billion despite significant outflows, aided by inflows including $3 billion in deposits from Saudi Arabia, a $750 million Eurobond issuance, and an anticipated $1.2 billion International Monetary Fund (IMF) tranche. “With buffers intact, the case for policy tightening weakens,” it noted.
Echoing a similar stance, AKD Securities said improved macroeconomic fundamentals provide space for the central bank to adopt a “wait-and-see” approach. The brokerage pointed to stronger real interest rates, improved fiscal buffers and stable foreign exchange reserves as key factors enabling policymakers to absorb external shocks without immediate rate hikes.
AKD Securities added that targeted fiscal measures, including cash subsidies, subsidised transport and petroleum levy adjustments, would help cushion inflationary pressures while managing import demand. It also highlighted that the fuel supply chain has remained intact despite disruptions around the Strait of Hormuz, limiting damage to economic activity.
The brokerage further cited encouraging geopolitical developments, including ceasefire extensions, as a potential pathway towards easing tensions, while Pakistan’s return to international capital markets after four years via Eurobond issuance is expected to further bolster reserves.
However, a more cautious and slightly hawkish view emerged from Shankar Talreja of Topline Securities, who said market expectations have shifted towards a rate hike amid prolonged conflict and elevated oil prices. According to a Topline poll, 53% of respondents now expect an increase in the policy rate, with the majority anticipating a 50-100 basis point hike. In contrast, 43% expect no change, while a small fraction foresee a rate cut. Talreja noted that the shift in sentiment reflects concerns over the longevity of the Middle East conflict and its impact on global crude prices, with over half of respondents expecting the conflict to persist beyond two weeks.