Oil price surge may lift Pakistan inflation to double digits

A sustained surge in global oil prices to about $100 per barrel could push Pakistan’s inflation rate into the 9–11% range in the coming months, though the increase would remain far below the peaks seen in recent years, according to a new report by Chase Securities.

In a research note released Sunday, the brokerage said Pakistan’s consumer price inflation — currently about 7% year-on-year in February — could rise within two to three months if higher international oil prices are fully passed on to consumers through the government’s weekly fuel price adjustments.

The firm said the expected increase would be “meaningful” but still manageable compared with inflation spikes above 20% recorded between 2022 and 2024.

“Direct fuel weight in the CPI basket is relatively modest,” the report said, noting that petroleum products account for about 0.99% of the inflation basket compiled by the Pakistan Bureau of Statistics.

However, analysts said the secondary effects of higher fuel prices could be more significant, particularly through transportation costs — which carry a CPI weight of about 6% — and food prices, which make up roughly 35% of the basket.

Government response viewed positively

The report said the government’s early policy response has been “appropriate and encouraging” from a macroeconomic perspective.

Emergency meetings led by Shehbaz Sharif have focused on petroleum reserve management and supply monitoring. Authorities have also pledged strict measures against hoarding and are using digital monitoring across the fuel supply chain.

Chase Securities noted that the government’s decision to fully pass through global oil prices to domestic consumers through weekly revisions avoids costly fuel subsidies and helps maintain fiscal discipline under Pakistan’s ongoing program with the International Monetary Fund.

Officials are also considering austerity measures to curb demand while ensuring that petroleum reserves remain adequate to meet national consumption, the report said.

Interest rate debate

Market participants have speculated that the State Bank of Pakistan may raise its policy rate, currently 10.5%, in response to higher inflation expectations.

Chase Securities said some policy tightening could occur but cautioned against aggressive moves, arguing the shock stems from supply-side energy costs rather than overheating demand.

“A moderate and calibrated rate response, if any, would be appropriate,” the report said, warning that sharp tightening could harm economic activity.

Remittances offer support

The brokerage also pointed to an unexpected stabilizing factor: rising remittances through formal banking channels.

According to the report, disruption of informal money transfer networks linked to the Gulf region — amid tensions in the Middle East — has pushed many overseas Pakistani workers to send money through official banking channels instead.

This shift could provide support to Pakistan’s current account balance, partially offsetting the impact of higher oil import costs.

The report added that disruptions to shipping through the Strait of Hormuz have sharply reduced Pakistan’s ability to import liquefied natural gas, lowering foreign exchange outflows previously used for LNG cargo purchases. While that could strain domestic energy supply, it may ease pressure on foreign currency reserves.

Energy sector seen as major beneficiary

Chase Securities said the crisis could create opportunities in Pakistan’s stock market, particularly for energy producers listed on the Pakistan Stock Exchange.

Higher oil prices are expected to boost earnings for domestic exploration and production companies including Oil and Gas Development Company Limited, Pakistan Petroleum Limited, Pakistan Oilfields Limited and Mari Petroleum Company Limited.

With LNG imports constrained, domestic gas output could become more strategically important, potentially leading to higher local gas prices, increased demand for indigenous energy and expanded production incentives, the report said.

Oil marketing companies could also benefit from inventory gains, while local refineries may see improved refining margins.

Banks and dividend sectors attractive

The report said Pakistan’s banking sector could gain if rising inflation pushes up government bond yields. Banks hold large volumes of floating-rate government securities that could be repriced at higher returns.

Meanwhile, defensive sectors such as oil, banking and fertilizer companies are expected to remain attractive to investors because of strong dividend yields.

The benchmark KSE-100 index is currently trading at roughly seven times earnings, a valuation the brokerage described as attractive compared with historical levels.

Investors urged not to panic

Despite geopolitical uncertainty, Chase Securities advised investors not to exit equities entirely but instead to rebalance portfolios toward sectors likely to benefit from higher energy prices and interest rates.

The report said Pakistan has historically recovered quickly from geopolitical shocks, citing market rebounds following the 2011 Arab Spring and the 2019 India-Pakistan tensions.

“The investors who captured the largest gains in Pakistan’s equity market were those who bought at the height of pessimism,” the report said.

Chase Securities added that Pakistan is not directly involved in the current conflict, and with remittances rising, the IMF program intact and key sectors positioned to benefit from higher energy prices, the country’s economic impact should remain manageable.