Fuel shock to push inflation past 15% as rate hike risks resurface

Pakistan is likely to face a renewed phase of inflation and tighter monetary conditions following a record jump in fuel prices, with analysts warning that the economic fallout could unfold rapidly over the next quarter.

Economists expect Consumer Price Index (CPI) inflation to climb sharply from 7.3% year-on-year in March 2026, compared with 7% in February and 0.7% in March 2025, as higher transport and energy costs begin feeding into the broader price structure.

The warning comes days after the government implemented a steep increase in petroleum prices to contain the fiscal burden of subsidies, raising diesel prices by 55% and petrol by 43% in one of the largest single adjustments in recent years.

Short-term price indicators are already reflecting the pressure. Weekly data released by the Pakistan Bureau of Statistics (PBS) showed that Sensitive Price Index (SPI) inflation rose by 1.01% for the week ending April 2, primarily due to a 13.28% surge in Liquefied Petroleum Gas (LPG) prices.

The inflation spike is also expected to influence monetary policy decisions. Analysts are projecting a 1 to 2 percentage point increase in the policy rate in the upcoming monetary policy review as the central bank moves to contain inflationary momentum and stabilize expectations.

Last month, the central bank maintained its benchmark policy rate at 10.5%, opting to hold rates steady amid rising geopolitical tensions in the Middle East that have driven global energy prices higher.

Currency pressures are simultaneously building. Market projections suggest the Pakistani rupee could depreciate by 5% to 7% in the near term, potentially pushing the exchange rate to around Rs290 per US dollar by June, particularly if energy import costs remain elevated.

Meanwhile, supply-side risks in the energy sector are complicating the outlook. Analysts have cautioned that a potential shortfall in Re-gasified Liquefied Natural Gas (RLNG) imports from Qatar, combined with transmission bottlenecks, could push electricity generation costs higher and trigger intermittent load shedding, especially in Punjab during peak summer demand.

In a partial relief measure following the fuel hike, Prime Minister Shehbaz Sharif announced a temporary reduction in the petroleum levy on petrol by Rs80 per litre for one month, though economists believe the move is unlikely to materially offset the broader inflationary impact.