Six-month Kibor hits 19-month low as rate cuts loom

KARACHI: The six-month Karachi Interbank Offered Rate (Kibor) dropped to a 19-month low on Thursday.This came as there are expectations that inflation will decrease back to single digits for the first time in three years in August, increasing the likelihood of a further interest rate cut by the State Bank of Pakistan next month.

According to the SBP’s data, the six-month Kibor, which is a benchmark rate for lending to consumers and businesses, was at 17.94 per cent, the lowest level since January 2023, down from 18.57 per cent on Wednesday.

Following Wednesday’s T-bill auction, where cut-off yields dropped by 74-148 basis points (bps) across all tenors, the three-month, six-month, nine-month, and 12-month Kibor rates have decreased by 80 bps, 63 bps, 56 bps, and 33 bps, respectively. This reflects the market’s increasing expectations of lower inflation numbers, leading to expectations for a 150bps interest rate cut at the upcoming monetary policy meeting scheduled for September 12.

The SBP cut its benchmark interest rate by 100bps to 19.5 per cent last month. It slashed rates for the second time in a row. With this move, the rate has been lowered by a total of 250bps since the last meeting in June.

JS Research said in its note that Pakistan is likely to experience single-digit inflation for the first time in three years from August, with the consumer price index inflation expected to clock in at 9.3 per cent year-on-year and rise by 10 basis points month-on-month.

Sequential price increases in food (35 per cent weight) are expected to outpace the decline in energy prices.“While August reading is poised to propel real interest rates (RIR) back to 10 percentage points (ppt+) last witnessed in May-2024, Sep-2024 reading potentially dipping below 8.5 per cent would further expand RIR closer to 11 ppt, a level last recorded in mid-1998,” it said. “For FY25, in addition to incorporating higher milk prices, power and gas prices, and POL product prices, we also factor in a second-round impact of some of the energy cost increase to food prices, which take our FY25 average CPI to 9.0 per cent,” it added. “In our view, abating inflation strengthens the monetary policy committee’s case for continuing the easing cycle in the September meeting with a third consecutive interest rate cut, this time of 150bps, bringing the policy rate down to 18 per cent.”