Start of monetary easing: experts weigh in on SBP’s decision to cut key policy rate

In its first cut in four years, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday announced a policy rate reduction of 150 basis points, taking it to 20.5%.

The announcement, which comes just a couple of days ahead of the budget announcement, was in line with market expectations, analysts who largely expected a decline of 100-200 bps told Business Recorder.

The central bank’s decision to initiate monetary easing comes after CPI inflation simmered down to 11.8% in May, significantly lower from a historic high of 38% last year during the same month. Moreover, several central banks around the world including the Bank of Canada, Bank of England have already initiated rate cuts.

“It was about time,” Sana Tawfik, Head of Research at Arif Habib Limited (AHL), a brokerage house that had earlier projected a rate cut of 200bps, told Business Recorder.

The analyst was of the view that the decision would be positive for the cement, power, textile, chemical and auto sectors.

Mustafa Pasha, chief investment officer at Lakson Investments, said he believed the impact on markets in the near term is expected to be muted.

“In terms of future policy expectations, we expect the SBP to pursue aggressive cuts in September’s MPC, and by year-end, the policy rate is expected to come down to 16-17%,” he said.

“At present, the central bank has a good balance, in terms of stable currency, positive current account and lower inflation. Going forward, we expect a rate cut by 4-5% by the end of this year,” he said.

Economic activity has been slow in the South Asian country for the last two years after the government implemented tough reforms under an International Monetary Fund (IMF) bailout in a bid to stabilise a crumbling economy.

However, the phase is not yet over as Islamabad is again in talks with the IMF for a new longer-term bailout.

The global lender has long been an advocate of a tight monetary stance, and has linked any loosening of the policy stance to be supported by further evidence that “inflation remains on a declining trend, pass-through remains contained, and possible exchange rate pressures from FX market normalization are limited.”

However, market experts were of the view that the latest SBP’s rate cut does not go against the IMF diktat, as the policy rate still remains “too high”

“I don’t think it will impact the IMF. The lender will be more concerned on budgetary measures,” said Pasha.

“If the policy rate is reduced from 22% to 16%, still it is a tight rate,” he said.

“However, one cannot have a super accommodative policy, given our heavy debt repayments.”

With the government expected to present the budget in the coming days, analysts expect some measures to have an inflationary impact.

“However, even if that is the case, a rate hike is least likely,” expressed Tawfik.

The market expert was of the view that the impact of the upcoming budgetary measures would come with a lag. “If the measures are inflationary in nature, and CPI inches up to 12-14%, still the current policy rate remains supportive,” she maintained.

Meanwhile, Asad Ali Shah, a leading economist, also lauded the central bank’s decision. “Good to hear interest rate cut of 150bps by SBP,” Shah wrote on social media platform X.

“Had suggested a rate cut of 300bps. Hope there will be more cuts in the near future,” he said.

Shah was of the view that with inflation below 12%, and expected to fall in the single digit in coming months, “more policy rate cuts are required to revive growth and contain budget deficit”.

Khurram Schehzad, CEO Alpha Beta Core, in a note, termed the rate cut of 1.5% “a bold decision” by the SBP, especially before the finalisation of the new IMF programme and the announcement of Budget FY25.

Schehzad said several factors, including lower inflation, and current account surplus, led to the SBP’s decision.

“Now the ball is in courts of fiscal authorities how they make the best use of this fiscal room (rate cut will help reduce domestic debt servicing in FY25 est around Rs900 billion), and how they bring in non/under-taxed sectors into the net while giving breather to formal sector and salaried class, alongside reducing upto Rs1 trillion of fiscal expenditures that can be cut, amongst other actions i.e. energy overhaul, shutting/privatising SOEs, pension reforms and so on,” he wrote.