• The world is negotiating peace amid uncertainty, therefore, at a time like this, we believe policy must continue to lean toward discipline over impulse. We expect the SBP to keep the policy rate unchanged at 10.5% in the Apr’26 MPS.
• Since the last MPS, global conditions have stayed unsettled, with US–Iran tensions continuing to steer sentiment. In this environment, oil has remained a swing factor, sharp enough to move markets, but not stable enough to define a clear trend.
• Prices surged, with Arab Light peaking at ~USD 135/bbl, then retracing to ~USD 102/bbl and briefly dipping toward ~USD 77/bbl, highlighting pronounced volatility rather than any clear directional trend.
• All this external noise has filtered into domestic prices, but without destabilizing the broader inflation narrative. Transport inflation has seen sharp bursts (12% MoM in Mar’26, ~15% expected in Apr’26), yet the spillover remains contained, with no meaningful evidence of second-round pressures building up. CPI has edged up modestly to 7.3% YoY in Mar’26, keeping FY26 average at 5.67%, firmly within an anchored range.
• Looking ahead, the expected move in CPI toward double digits in 4QFY26 is largely a base-effect story, transient in nature and driven more by energy pass-through than any demand-side overheating. Beyond this short-lived spike, assuming external conditions remain stable, our base case remains intact, with inflation averaging 7.1% in FY26 and 8.5% in FY27, while core inflation stays contained at 8%.
• In essence, this is a supply-driven pulse, not a demand-led cycle. Responding to such temporary pressures with policy tightening risks overcorrection, particularly when inflation expectations remain anchored and the medium-term outlook continues to sit within a manageable range.
• At the same time, the economy has only just begun to regain momentum, with GDP expanding by 3.89% in 2QFY26. With 3Q expected to be impacted by the conflict spillover, risks to growth persist, making a rate hike counterproductive at this stage.
• On the external front, resilience remains intact. Pakistan posted a USD 1.07bn current account surplus in Mar’26, the highest in a year, driven by strong remittances and a narrower trade deficit. Even with oil around USD 100/bbl, the FY26 current account deficit is expected at a manageable ~USD 1.6bn, with further downside risk if prices ease, while FY27 is projected at ~USD 3.5bn under USD 85/bbl assumptions.
• The PKRUSD has remained stable despite sizeable external flows. Saudi Arabia provided USD 3bn in new deposits and extended its USD 5bn facility, while Pakistan raised USD 750mn via a Eurobond and awaits a USD 1.2bn IMF tranche. Outflows included USD 1.3bn Eurobond repayment and USD 2bn to the UAE. Despite this, FX reserves stand at USD 15.1bn (excluding USD 1bn Saudi inflow). With buffers intact, the case for policy tightening weakens.
• Amid this backdrop, calls for tightening have gained some traction, particularly around IMF considerations. However, “tight” is relative, at 10.5%, policy already sits in restrictive territory, in our view. Importantly, pressures remain largely supply-driven rather than demand-led. In such conditions, further rate hikes risk dampening activity without addressing the underlying cause.
• Financial markets have already demonstrated how swiftly sentiment can reverse. During peak tensions, fixed income yields surged sharply, with T-bills and PIBs rising by 100–200bps, before partially retracing to 60–130bps as ceasefire developments eased concerns. These are reactions to uncertainty, not signs of systemic imbalance.
• Globally, different central banks, including the Fed, ECB, and RBI, have largely opted to keep policy rates unchanged, although noting risks from a Middle East conflict.
• In line with our view, our AHL survey shows 61% expect no change, 19% anticipate a 50bps hike, 17% a 100bps hike, and 3% a 150bps increase.
• For now, patience remains the more prudent choice. Let the talks conclude. Let outcomes take shape. The next policy in Jun’26, alongside the federal budget, will offer a clearer landscape for recalibration if required.

Courtesy – AHL Research