KARACHI: The State Bank of Pakistan (SBP) is expected to cut its key interest rate at its June 10 meeting to the lowest level in 15 months amid evidence of continued improvement in macroeconomic indicators.
In a report released on Friday, analysts at Arif Habib Limited (AHL) noted that market bets and expectations of an interest rate cut from the SBP are growing as the monetary policy meeting approaches. If the central bank lowers rates, it will be the first since June 2020.
“We are expecting a reduction of 200 bps [basis points] in the policy rate, potentially lowering it to 20 per cent, a level last seen in March–April 2023,” the report said.“This forecast is underpinned by several favourable economic indicators, suggesting a conducive environment for initiation of reversal in monetary policy,” it added.
Most financial market players the AHL polled also forecast a 2 percentage point cut in the interest rate at the upcoming policy meeting.The SBP has kept the policy rate at a record 22 per cent since July 2023. It would be interesting to know what the SBP’s Monetary Policy Committee decides regarding borrowing costs.
Furthermore, on June 7, Pakistan will unveil its annual budget for FY2024–2025 ahead of a potential IMF loan.One of the primary factors supporting the expectation of a rate cut is the downward trajectory of Pakistan’s inflation, the AHL report said.
Both headline and core inflation figures have shown significant improvement. The average headline inflation for the 10 months of FY24 has decreased to 25.97 per cent, down from 28.23 per cent during the corresponding period last year.
“For May, inflation is anticipated to further decline to 13 percent, which would result in a real interest rate of 900 bps -- substantially higher than the historic 10-year average of negative 44 bps,” it added.
“On the external front, the current account deficit has shown remarkable improvement in July and April FY24, narrowing by 95 per cent to $202 million. This significant reduction has contributed to the stability of the rupee against the dollar,” it noted.
In its recent country report, the IMF has acknowledged these positive economic developments but has emphasized the importance of maintaining a tight monetary policy to ensure continued stability. The IMF also suggested that the stance could be reassessed if Pakistan’s inflation continues to decrease and improvements in the foreign exchange market persist.
The report believes even with a potential rate cut of 200bps, Pakistan would still align with the IMF’s stance on maintaining a relatively tight monetary policy. Given the improvements in light of inflation and the external account, it is plausible to foresee an easing in the monetary policy framework.
“The anticipated rate cut would not only support economic growth but also align with the evolving economic conditions,” it said.Since the last monetary policy announcement in April 24, a decline in yields for government securities in both primary and secondary markets has been observed. This decline in yields suggests a growing market sentiment anticipating a potential rate cut, according to the report.