30 June 2026 · Rates · Inflation · FY26
FY26 (July 2025–June 2026) opened with a real-rate cushion near seven points and, by May, the cushion was gone. Scroll through the policy rate against inflation, month by month, and watch the moment the Gulf war erased it.
A real interest rate is the policy rate minus inflation. For most of FY26 it stayed comfortably positive — the cushion that let the SBP call its stance tight. Then the Gulf war pushed energy costs through the economy, inflation climbed faster than the bank could move, and the cushion collapsed. The two lines below tell that story in sequence. Scroll to walk the year.
By the most recent confirmed reading, the picture is the one the chart leaves you on: a policy rate held at 11.5%, inflation at 11.7% in May, and a real rate that has already turned negative. The SBP's own guidance points to inflation staying in double digits for months to come, which leaves little room for that gap to close. June was spent celebrating the other half of the story — the ceasefire and the oil crash, which helped extend the equity rally. Both are true at once. The oil relief is real, and it is flowing through the import bill now. The real-rate cushion is gone, or close to it, and that is what governs how fast the SBP can cut in FY27.
Three channels carry the year into FY27.
The stock rally is betting on a rate cut the bank may not be able to give. Banks and other rate-sensitive stocks have climbed partly on the expectation of cuts in the second half of FY27. But the SBP has very little room to cut unless inflation falls fast — the cushion that would let it ease into a stubborn print is all but gone. If you hold banks or rate-sensitive stocks, you are betting on that one outcome, not spreading your risk.
Borrowing in FY27 will not get cheaper as fast as the market hopes. With next to no cushion left, the SBP has little room to cut into a fresh oil or rupee shock without falling further behind. Do not plan next year's financing or budget around a smooth, steady drop in rates. Assume the first cut comes later, and is smaller, than what the rally is pricing in.
Cheap oil does not mean the rupee is safe. The currency's defence now rests on reserves and capital inflows, not on a comfortable gap between local and global rates. If you carry dollar payables or import goods priced off Gulf oil benchmarks, the case for hedging has changed even though crude has gotten cheaper.
Treat cheap oil and the lost rate cushion as two separate facts, not one mood. One is helping the current account today. The other limits how much room the SBP has to cut in FY27. The cushion was already wide open at the start of FY26; the final quarter nearly wiped it out. Do not assume the next shock gets met the same way the last one was.