The US government announced on Sunday that it has suspended $800m in military aid to Pakistan amid a further deterioration in the relationship between the two countries. The announcement is clearly a blow to Pakistan’s fiscal consolidation plans. However, the real risk concerns a much more serious fall-out in relations with the US, which puts the whole US aid budget at risk. Such a move, although unlikely, would make further interest rate hikes by the central bank (SBP) almost unavoidable.