Fed tightening may pressure PKR but rising oil remains bigger risk for Pakistan, warn experts

The US Federal Reserve’s 25-basis-point interest rate hike is unlikely to have a major immediate impact on Pakistan, market experts told Business Recorder, although it could put pressure on the rupee, raise dollar-based debt-servicing costs and make future external borrowing more expensive.

The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, bringing the benchmark overnight interest rate to a range of 3.75%-4.00%, marking the first policy shift under the new Fed chief, Kevin Warsh, who took office in late May.

Updated projections indicate that 16 out of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year.

Waqas Ghani, Head of Research at JS Global, said the Fed hike “could add some pressure on the rupee and tighten global financial conditions, while making future external borrowing expensive.”

“However, Pakistan’s near-term financing is relatively insulated, as the US$3 billion Eurobond issued in September is already locked in.

“The bigger immediate risk remains elevated oil prices, given their direct impact on Pakistan’s import bill and external account,” Ghani added.

Saad Hanif, Head of Research at Ismail Iqbal Securities, said the Fed’s 25bps hike, along with its signal that more tightening may follow, “is unlikely to be a major shock for Pakistan on its own.”

“SBP’s reserves are at a record $21.4 billion, foreign participation in the local debt market is relatively limited, and the recent $3 billion Eurobond was priced before the move, so direct pressure on the rupee and capital flows should remain contained,” he said.

Hanif said the “more important channel is monetary policy”.

“With inflation at 11.1% YoY in August, Pakistan’s real policy rate on current inflation is only around 0.4%, so a tighter Fed makes near-term rate cuts unlikely and could tilt SBP towards a tighter stance if the rupee or inflation expectations come under pressure,” he said.

“Servicing costs on floating-rate external debt, such as SOFR-linked commercial loans, are also likely to rise,” Hanif added.

“That said, the Fed is largely reacting to an energy shock, and for Pakistan oil remains the bigger risk,” he warned.

“With crude hovering near $100/bbl, well above the $80/bbl assumed in SBP’s July projections, the pressure on inflation and the current account matters more than 25bps in Washington.”

Saad Khan, Senior Vice President at a private global consulting company, said the Fed hike “would intensify pressure on the rupee and raise dollar-based debt-servicing costs.”

“It could also make imports, especially fuel and fertiliser, more expensive, worsening inflation and the trade balance,” he said.

“Although reserves have improved, Pakistan still faces about ~$21.5 billion in external repayments in FY2027,” Khan added.

“The deeper issue is Pakistan’s dependence on borrowing, imports, and remittances rather than strong export growth,” he said.

Sana Tawfik, Head of Research at Arif Habib Limited (AHL), said there was “no major impact” from the Fed move, describing it as “a mild hike”.

“But the implication is that the rate hike is to strengthen the US dollar as bond yields will go up,” she said.

 “Globally, we are seeing that the economies are going towards tightening,” Tawfik said.

“Our macros are still supporting the status quo,” she said. “Going forward, we will have to see if global headwinds persist, and then in which direction our monetary policy stance goes,” she added.

Days ago, the State Bank of Pakistan (SBP) Monetary Policy Committee (MPC), in its second meeting in the fiscal year 2026-27, decided to keep the policy rate unchanged at 11.5%.