KARACHI: Pakistan’s central bank would likely announce its first interest rate cut in more than three and a half years in March 2024 following an anticipated sharp decline in price pressures, a brokerage report said on Tuesday.
After pushing the benchmark interest rate 1,500 basis points (bps) higher to combat record-high inflation and shocks in energy and food prices, the policymakers have kept it at 22 percent since July 2023.
According to the information posted on the State Bank of Pakistan (SBP) website, the Monetary Policy Committee will hold its next monetary policy review meeting on October 30. The last meeting was held on September 14.
In a note, analysts at the Karachi-based brokerage firm Arif Habib Limited stated that there are solid grounds for thinking that inflation has peaked and would gradually decline over the next six months.
This is a major factor behind the SBP’s decision to keep the policy rate steady during the past two reviews. Given the expected decrease in inflation to 19 percent by March, there appears to be ample room for the central bank to contemplate the initiation of a policy easing move.
This could potentially involve announcing a reduction of 100bps in March. “Notably, this would mark the first rate cut since June 2020, representing a gap of over 3.5 years,” said the report.
The forecasts show a significant drop in both the year-on-year (YoY) and month-on-month (MoM) inflation rates from April to June. The annualised rates are expected to decline even further in May, to 17.0 percent, giving SBP adequate room to cut policy rates as the real interest rates turn positive.
The report expects the central bank to cut the rates by 200bps in the last quarter of this fiscal year, closing FY2024 around 19 percent level.
The beginning of the current fiscal year saw strong year-on-year headline inflation, which averaged 27.8 percent in July–August and spiked to 31.4 percent in September mostly because of a low base effect and higher fuel costs.
“While we expect the headline inflation to remain elevated over the remaining months
of 2023 (average consumer price index or CPI of 28.6 percent YoY in the fourth quarter of 2023) amid aggressive tariff increases, we see a sharp decline in the second half of FY2024 with inflation declining to 17 percent by April due to a combination of high base effect and slower month-on-month inflation,” it said.
“This should provide ample room for the SBP to start monetary easing with a 300bps rate cut in the second half starting March 2024,” it added.
“We have conservatively incorporated future gas and electricity tariff hikes, PKR depreciation, and GST [general sales tax] on petroleum products in our assumptions resulting in FY2024 headline inflation estimate of 24.5 percent, (higher than SBP’s target band of 20-22 percent),” the report said.