Short-term Kibor rates fall after SBP cuts policy rate for second straight time

KARACHI: Driven by the State Bank of Pakistan’s 100 basis point interest rate cut, coupled with decreasing inflation and improving external account conditions, Kibor rates for one-week to one-month tenors fell on Tuesday.

KIBOR represents the average interest rate at which banks are willing to lend money to other banks.According to the SBP’s data, on a day-on-day basis, the one-week KIBOR decreased by 53 bps to 20 per cent, the two-week tenor rate declined by 37bps to 19.98 per cent, and the one-month KIBOR fell by 30bps to 19.96 per cent. However, there was a slight increase of 1-2bps in rates across three months to one year.

The SBP reduced its key interest rate to 19.5 per cent on Monday. The SBP slashed rates for the second time in a row. This decision was widely anticipated by markets and analysts. With this move, the rate has been lowered by 250bps overall since the last meeting in June.

“The SBP expects inflation to remain in the range of 11.5-13.5 per cent, suggesting that the interest rate cut cycle may have just begun, with further reductions anticipated in upcoming meetings,” said Chase Securities in a note.

The SBP’s monetary policy committee (MPC) noted that inflation in June 2024 was slightly better than expected. The committee also evaluated that the inflationary impact of the FY25 budgetary measures was largely in line with earlier expectations.

The external account has continued to improve, demonstrated by an increase in SBP’s foreign exchange reserves despite substantial debt repayments and other obligations.“Considering these developments -- along with significantly positive real interest rate -- the committee viewed that there was room to further reduce the policy rate in a calibrated manner to support economic activity while keeping inflationary pressures in check,” the SBP said in a statement.

The committee evaluated that, even with this decision, the monetary policy stance remains sufficiently stringent to steer inflation towards the medium-term target of 5-7 per cent. However, this is contingent on achieving the intended fiscal consolidation, timely realization of planned external inflows, and addressing the underlying weaknesses in the economy through structural reforms.

The SBP also highlighted that debt repayments of $26 billion are due in FY25, of which $16 billion is expected to be rolled over, and $10 billion will need to be repaid. Notably, $1 billion has already been repaid. The SBP mentioned that all backlogs of pending dividend repatriation have been cleared.