Analysts expect SBP to cut interest rate by 50bps

KARACHI: The State Bank of Pakistan (SBP) is expected to trim its benchmark interest rate by 50 basis points (bps) to 11.5 per cent at its upcoming monetary policy meeting on May 5, according to research by brokerage firm Arif Habib Limited.

The SBP paused its easing cycle in March when it kept the rate at 12 per cent, citing risks from volatile food and energy prices and external account pressures. However, it also acknowledged that inflation was falling steadily in the country.

Arif Habib analysts argue that with headline inflation dropping to a six-decade low of 0.7 per cent in March and projected to fall further to 0.45 per cent in April, there is ample room for a measured rate cut to support economic recovery. The real interest rate has surged to an exceptional 11.3 per cent, they said, allowing monetary easing without jeopardising macroeconomic stability.

Average headline inflation for the first 10 months of FY25 is estimated at 4.88 per cent, down sharply from 26.22 per cent in the same period a year earlier, largely driven by high base effects and lower food prices. However, analysts caution that the base effect is expected to dissipate in the coming months, potentially exerting upward pressure on inflation. Core inflation, excluding food and energy (NFNE), remains elevated at a projected 7.72 per cent year-on-year in April, with a ten-month average of 10.05 per cent.

External accounts have also shown improvement, offering some breathing space. Pakistan posted a current account surplus of $1.86 billion during the first nine months of FY25, compared to a deficit of $1.65 billion a year earlier. This turnaround was largely driven by a 33 per cent year-on-year increase in remittances to $28 billion.

However, imports rose by 11 per cent year-on-year to $40.4 billion over the same period, signalling early signs of demand recovery that could revive pressure on the current account and exchange rate. Arif Habib warned that the SBP must tread cautiously as it calibrates the pace of monetary loosening.

Meanwhile, weakness in industrial activity adds weight to the case for a rate cut. Output from large-scale manufacturing industries (LSMI) declined by 3.5 per cent year-on-year in February and fell by 5.9 per cent month-on-month. For the first eight months of FY25, LSMI output shrank by 1.9 per cent compared to the same period a year ago, signalling subdued demand across key sectors.

The money market has sent mixed signals. Longer-term yields have declined, with three- and five-year rates falling by 35 basis points and 26 basis points respectively, suggesting expectations of lower interest rates. In contrast, shorter-term yields edged higher.

A survey conducted by Arif Habib ahead of the monetary policy meeting found that 54.6 per cent of market participants expect a cut in the policy rate. Of those, 36.4 per cent foresee a 100bps reduction, while 18.2 per cent expect a 50bps cut. The remaining 45.4 per cent anticipate rates will remain unchanged at 12 per cent.