...therefore Pep Guardiola still needs Kyle Walker's services at least until next season.
Of course, but the problem is that Pep wouldn't need his services throughout the season, he will be picked specifically for certain games, just like what happened last season. I'm pretty sure Walker doesn't want that, he wants to move to a team in which he can start nearly every game, and he knows City can't give him that and this is why they are offering him just a one year contract. If kyle Walker leaves City, it is because he knows that his game-time at the Etihad would be quite limited next season.
It will be better for a team to have excess players than to suffer a deficit. Manchester City might think Kyle Walker is not important until they lose some players to injuries or suspension. That player you think is not important will suddenly become the backbone of the team. City will be competing for four important competitions and they are defending three. It will be a tight schedule for the players and most of them will be prone to fatigue and injuries. City needs more players than before.
For me, it will be good to keep the English international for more seasons until they get the right reserve player. And from all indications, Pep Guardiola is not willing to let the 33years defender move regardless of interest from Bayern Munich. Although Walker is not pleased with seating on the bench, it is also a privilege to play in a club that has achieved much. He didn't play in the champions league finals against Inter Milan but he also got a gold medal.