To cut or not to cut: SBP might opt for caution in monetary policy

The State Bank of Pakistan (SBP), scheduled to announce the key policy rate on April 29 (Monday), might opt to delay any easing of monetary policy as it looks to strike a balance between spurring growth and keeping inflationary pressures in check.

A report by brokerage house Arif Habib Limited (AHL) – in which it cited a divided poll result that suggested 52% respondents expect ‘no change’ in the upcoming announcement, while the remaining 48% see a cut – said the money market has also shown a mixed trend since the last monetary policy update.

The central bank’s Monetary Policy Committee (MPC) had kept the key policy rate unchanged at 22%, its sixth successive decision to maintain the status quo, in its last announcement on March 18.

“Amidst uncertainty regarding the inflation outlook, key central banks in both advanced and emerging economies have continued to maintain a cautious monetary policy stance in recent meetings,” the MPC had stated back then.

However, headline inflation decelerated to 20.7% on a year-on-year basis in March, data released on April 1 said, suggesting that a monetary easing cycle was on its way. Stocks have already rallied and the KSE-100 closed Friday at a record high.

AHL cautioned that market sentiment is still divided.

“In the primary market for Treasury bills (after the previous meeting), the changes have been marginal with the 3-month and 12-month yields showing no change, and the 6-month yield increasing by 0.99%,” it said in a report on Friday.

“In the secondary market, the changes have been more varied: the 3-month yield rose by 0.43%, the 6-month by 0.13%, and the 12-month by 0.45%. There was no change in the 3-year yield, a slight increase of 0.05% in the 5-year yield, and a minor decrease of 0.02% in the 10-year yield.

These trends indicate a divided market sentiment regarding the current monetary policy stance, it added.

AHL said that rising global oil prices – which already resulted in the government hiking fuel prices in its previous announcement as it passed on the impact – are “complicating matters further”.

“Anticipated fiscal measures in Pakistan’s FY25 budget could (also) exacerbate inflationary pressures,” it added.

“At the same time, ongoing negotiations with the International Monetary Fund (IMF), which has recommended maintaining a tight monetary policy, underscore the delicate balance the SBP must strike.

“With the IMF stressing the necessity for continuous economic adjustments and with Pakistan facing substantial debt repayments of $24 billion in the upcoming fiscal year, the SBP is poised to maintain a cautious policy stance.”

Pakistan, which is currently enrolled in a $3-billion Stand-By Arrangement (SBA), looks set to resume another programme with the IMF. Finance Minister Muhammad Aurangzeb on Friday said Pakistan hopes a broad outline of the new loan would be agreed upon in May, just in time as Islamabad finalises and announces its annual budget.

AHL said that recent trends suggest a scenario that typically supports a case for lowering interest rates.

“This policy adjustment could rejuvenate economic growth by decreasing borrowing costs, thus improving the business environment and enhancing production.

“However, this potential shift arrives at a time when Pakistan’s industrial sector shows signs of strain. For 8MFY24, the LSMI experienced a modest YoY decrease of 0.5%, with 11 out of 22 sectors marking negative growth, a clear indicator of a significant industrial slowdown.

“Furthermore, the government’s borrowing costs have escalated alarmingly, reaching Rs4.2 trillion in 1HFY24, accounting for ~61% of total revenue.”

In its report, AHL said a conservative approach aimed at stablising the economy while ensuring approval of a critical, new IMF programme might lead to a delay in monetary easing.

Separately, a report by another brokerage house Topline Securities also suggested a similar expectation.

In its survey, Topline said 51% of participants expect the policy rate to remain unchanged at 22%, while the remaining 49% anticipate a policy rate cut.

“We believe that the SBP will maintain cautious approach despite encouraging trends and adopt a ‘watch and see’ approach until the inflation trend maintain its fall,” it said in a note.