Pakistan's inflation is projected to average 7.0-7.5% in the current fiscal year ending June 2027, lower than previously anticipated, following a retreat in oil prices after an easing of the US-Iran war. Topline Pakistan Research stated on Monday that the country's first interest rate cut of the year is now likely in September.
Revised Inflation Forecast
The revised forecast brings inflation closer to the government's target of 8.2% and below the International Monetary Fund's projection of 8.4%. The improvement in Pakistan's inflation outlook is attributed to easing global oil prices after months of heightened regional tensions.
Topline Pakistan Research revised its FY27 inflation forecast down by about one percentage point from an earlier estimate of 8.0-8.5%, citing a sharp fall in Brent crude prices. The brokerage noted that the softening is on the back of a likely resolution of the war, which has already lowered Brent oil prices by 39% to $71.8 per barrel from a peak of $118.35 per barrel on March 31, 2026.
Interest Rate Cut Expectations
The brokerage expects the State Bank of Pakistan to leave its benchmark policy rate unchanged at its July 27 meeting before cutting it by 100 basis points in September. Topline expects the policy rate to be lowered to 10.5% in September and by a further 50 basis points later in the fiscal year, taking the benchmark rate to 10.0% by end-FY27.
According to Topline Pakistan Research, the month-on-month inflation for FY27 averages at 0.54% compared to the last 2-year and 5-year average month-on-month growth of 0.58% and 1.20% respectively.
Key Assumptions
Topline's forecast assumes Brent crude prices remain in the $70-$75 per barrel range, the Pakistani rupee depreciates by 5-6% during the fiscal year, gas prices rise by 15% in August before falling 5% in January, and electricity tariffs increase broadly in line with currency depreciation.
The brokerage also expects food inflation to remain contained despite seasonal spikes during Ramadan and Eid, while lower fuel prices would help moderate transport costs.
Central Bank Caution
While the inflation outlook would justify an immediate easing in monetary policy, the brokerage said the central bank is likely to remain cautious in the ongoing month. Topline stated that there is room for a rate cut in the July Monetary Policy Committee meeting given the inflation pathway for the next 12 months, but the central bank will observe a status quo in July 2026 due to the fragile regional ceasefire and risks posed by the monsoon season to food production.
