Softer inflation in July to trigger 150bps policy rate cut in upcoming MPC: JS Global

A further slowdown in the Consumer Price Index (CPI)-based inflation reading could trigger the State Bank of Pakistan (SBP) to reduce the policy rate by 150 basis points (bps) in the upcoming Monetary Policy Committee (MPC) meeting.

The schedule of MPC meetings has not yet been issued by the SBP, though.

“With July 2024 CPI now further expected to cool down to 10.5%, despite a MoM uptick of 1.6%, Pakistan’s real interest rate (RIR) remains at sky-high levels, further expanding to 10 percentage points,” said JS Global in a report on Saturday.

“To recall, even with a rate cut in Jun-2024 (1.5% cut to 20.5% policy rate) Pakistan’s RIR was at 8ppt, despite inflation softening from 38% just a year ago to 12.6% in June,” noted the report.

Pakistan’s headline inflation decelerates further to 11.8% in May 2024

“This trend of abating inflation strengthens the Monetary MPC’s case for continuing the easing cycle at its upcoming July meeting, in our view. We expect another 1.5% cut in the upcoming MPS.”

Back on June 10, the SBP’s MPC decided to reduce the key policy rate by 150 bps, taking it to 20.5%. This was the first cut in the key policy rate in four years.

In its statement back then, the MPC said that while the significant decline in inflation since February was broadly in line with expectations, the May outturn was better than anticipated earlier.

“The MPC assessed that underlying inflationary pressures are also subsiding amidst a tight monetary policy stance, supported by fiscal consolidation,” it said.

“This is reflected by continued moderation in core inflation and ease in inflation expectations of both consumers and businesses in the latest surveys.

“At the same time, the MPC viewed some upside risks to the near-term inflation outlook associated with the upcoming budgetary measures and uncertainty regarding future energy price adjustments. Notwithstanding these risks and today’s decision, the Committee noted that the cumulative impact of the earlier monetary tightening is expected to keep inflationary pressures in check.”

Earlier, BMI, a Fitch Solutions Company, in its ‘Pakistan Country Risk Report’ published on July 15 expected that the SBP will cut the key policy rate at its next MPC meeting.

The SBP is expected to cut its key policy rate to 16% by the end of this calendar year i.e. 2024, and lower it further to 14% by end of 2025, projected BMI in its report.