Reversal in stance: SBP might opt for rate cut in upcoming MPC meeting, brokerage house says

The State Bank of Pakistan (SBP), scheduled to announce the key policy rate on June 10 (Monday), might opt for easing of monetary policy amid a downward trajectory of the inflation rate, brokerage house Arif Habib Limited (AHL) said on Friday.

“We are expecting a reduction of 200bps in the policy rate, potentially lowering it to 20%, a level last seen in Mar-Apr 2023,” AHL said in its report.

The brokerage house – in which it cited a poll result that suggested 73% respondents expect SBP to ‘reduce the policy rate’ in the upcoming announcement, while the remaining 27% see no change – said the market sentiment also suggests expectations of a rate cut.

The central bank’s Monetary Policy Committee (MPC) had kept the key policy rate unchanged at 22%, its seventh successive decision to maintain the status quo, in its last announcement on April 29.

Back then the MPC viewed that the level of inflation is still high.

“The recent geopolitical events have also added uncertainty about their outlook. Moreover, the upcoming budgetary measures may have implications for the near-term inflation outlook,” the committee had stated back then.

However, AHL in its report was of the view that its projection of a rate cut is underpinned by several favorable economic indicators i.e. lower inflation, decline in current account deficit and government yields, suggesting a conducive environment for initiation of reversal in monetary stance.

“One of the primary factors supporting the expectation of a rate cut is the downward trajectory of Pakistan’s inflation. Both headline and core inflation figures have shown significant improvement,” it said.

CPI inflation decelerated to 17.3% on a year-on-year basis in April, data released by the Pakistan Bureau of Statistics (PBS) on April 1 said, suggesting that a monetary easing cycle was on its way.

AHL in its report anticipated inflation to further decline to ~13% in May 2024. This “which would result in a real interest rate of 900bps—substantially higher than the historic 10- year average of negative 44bps”, it said.

Inflation has become a key figure for Pakistan’s policymakers who are fighting multiple economic battles including pressure on its external account and low foreign exchange reserves.

The Finance Division in its latest monthly outlook published on Wednesday, had also projected headline inflation to hover around 13.5-14.5% in May 2024. “There are prospects for a gradual easing, with expectations of a decrease to 12.5-13.5% by June 2024,” it said.

Meanwhile, AHL noted that the International Monetary Fund (IMF) in its latest country report has emphasized the importance of maintaining a tight monetary policy to ensure continued stability.

“However, the IMF also suggested that the stance could be reassessed if Pakistan’s inflation continues to decrease and improvements in the foreign exchange market persist,” said AHL.

The brokerage house was of the view that even with a potential rate cut of 200bps, “Pakistan would still align with the IMF’s stance on maintaining a relatively tight monetary policy”.

“Given the improvements in inflation and the external account, it is plausible to foresee an easing in the monetary policy framework. The anticipated rate cut would not only support economic growth but also align with the evolving economic conditions,” it said.

Pakistan recently concluded the IMF’s $3-billion Stand-By Arrangement (SBA), which offered some relief to the debt-ridden economy, but Islamabad is now looking at a longer, larger programme with the lender.

AHL said since the last MPC, yields for government securities in both primary and secondary markets have declined.

“In the primary market, yields across various tenors have decreased, with reductions of 0.6% in 3-month yields, 0.38% in 6-month yields, and 0.80% in 12- month yields.

“Similarly, in the secondary market, yields have declined, with 3-month yields decreasing by 1.15%, 6-month yields by 0.40%, and 12-month yields by 0.88%.

“Moreover, PIB yields have also fallen, with the 3-year yield decreasing by 0.02%, the 5-year yield by 0.07%, and the 10-year yield by 0.04%.”

This decline in yields suggests a growing market sentiment anticipating a potential rate cut,“ it added.