a sudden fall,” Topline report said. “We anticipate SBP to cut the policy rate by 50bps and go for a further cut of 50bps later on.”
Analysts said weak international oil prices and flagging export demand have prompted neighboring economies including India to take aggressive action to ease monetary policy.
“India has also slashed its policy rates and it is expected that Pakistan would follow the suite” Ahsan Mehanti at Arif Habib Corp. “The market expects a 100 basis point cut in the upcoming monetary policy.”
The government has so far vowed to uphold a fiscal deficit target of 4.8 percent of GDP, but analysts caution that any further cuts in spending that the government has to make to hit it could further sap growth.
Analysts said the government needs low rate scenario to spur growth and at the same time keep deficit low.
And the finance ministry, often “jawbone” the central bank, could argue forcefully for lower interest rates. The central bank enjoys policy autonomy but lacks the kind of independence enjoyed by central banks in the west, on interest rates.
The falling yields in debt and bond markets also give adequate space to the central bank.
Yields on government securities have declined by 124-280bps and 2-year long-term Pakistan Investment Bond is trading at 9.0 percent which is down by 280bps, whereas yields on 6-month Treasury papers have declined by 124bps to 8.7 percent.
“A steep rate cut will provide a favorable push to spur demand and accelerate private credit offtake,” said analyst Faisal Mamsa at Landmark Capital. “But if you look around, most Central Banks’ approach has been very prudent in cutting benchmark interest rates and wants to see if inflation does keep low for an extended period.”
Mamsa said interest rates are not the only tools to increase growth, and the government should evolve an environment conducive for investments and long-term economic reforms. “Going forward, there is very little headroom for sustained easing in monetary policy.”