SBP expected to deliver sixth consecutive rate cut this month

KARACHI: Pakistan’s central bank is expected to cut its benchmark interest rate further at its policy meeting this month as easing inflation provides space for policymakers to boost weak growth.

In December, the State Bank of Pakistan (SBP) reduced the policy rate by 200 basis points (bps) to 13 per cent, marking the fifth consecutive cut since June. This brings the total rate reductions for 2024 to 900bps.

Inflation in Pakistan continues to decrease, with projections indicating the rate for January could fall into the lower single digits, suggesting the possibility of more rate cuts by the SBP. However, analysts are uncertain whether the SBP’s Monetary Policy Committee (MPC) will deliver a significant rate cut or pursue a more aggressive easing this time.

Most analysts, however, expect a reduction of 100bps at January’s meeting. The MPC’s meeting will occur as the country takes stringent measures to secure a $1 billion loan tranche from the International Monetary Fund. The next IMF review is due this quarter.

According to the SBP’s governor, Jameel Ahmad, inflation is expected to decline further in January but may rise later due to base effects and increasing energy prices. Nonetheless, he emphasised that inflation is projected to remain within the SBP’s target range of 5-7 per cent.

An analyst from Arif Habib Limited (AHL) anticipates a 100bps rate cut in the upcoming monetary policy meeting, bringing the policy rate down to 12 per cent. AHL’s forecast suggests that headline inflation will ease to 3.06 per cent in January, the lowest level in nine years. The consumer price index inflation slowed to 4.1 per cent year-on-year in December, down from 4.9 per cent the previous month.

AHL expects inflation to remain below 5.0 per cent through April, driven by favourable base effects, a stable exchange rate, and subdued prices in food and energy sectors. However, a reversal in this downward trend is likely in May and June, with inflation projected to rise to 8.81 per cent and 8.97 per cent, respectively. This increase is expected as the base effect dissipates after the first quarter, pushing inflation upward.

The real interest rate is projected to reach 9.98 per cent this month, significantly higher than its historical average of 2.5 per cent. The historical spread between the policy rate and core inflation has averaged around 1.7 per cent over the past nine years. According to AHL, these indicators suggest that the SBP has considerable room for further rate adjustments.

Saad Hanif, head of research at Ismail Iqbal Securities, expects a cut of 50-100 bps at the upcoming policy meeting, stating that most monetary easing is likely behind us. Awais Ashraf, director of research at AKD Securities Limited, anticipates a 200bps reduction in the policy rate given the ongoing disinflationary trend and muted GDP growth. “Further strength to our call came from stable currency given controlled external account position on the back of robust remittances and higher exports,” Ashraf said.