Analysts expect SBP to continue easing in next week’s monetary policy announcement

Analysts expect the State Bank of Pakistan (SBP) to continue with its easing stance as slower inflation and improved macroeconomic indicators boost sentiment of a third-successive reduction.

The central bank is scheduled to announce the key policy rate on September 12 (Thursday). It has reduced the rate by a cumulative 250 basis points in its previous two meetings.

“We anticipate a 150 basis points (bps) cut, bringing the policy rate down to 18% — a level last seen in February 2023, when it had dropped to 17%,” stated brokerage house Arif Habib Limited (AHL) in a report in which it cited a poll result that suggested 93% respondents expect a reduction, while the remaining 7% saw status quo.

Back in July, the central bank’s MPC reduced the key policy rate by 100bps, taking it to 19.5%.

“We have noted that the inflation is on a declining trend,” SBP Governor Jameel Ahmad stated back then.

Pakistan’s headline inflation clocked in at 9.6% on a year-on-year basis in August 2024, lower than the reading in July 2024 when it stood at 11.1%. The CPI-based inflation reading was back into single digits after a span of three years, showed Pakistan Bureau of Statistics (PBS) data.

This has resulted “in a real interest rate of ~1,000bps, which creates room for further rate cut,” said AHL.

JS Global, another brokerage house, shared a similar view in its report, saying that “the abating inflation strengthens the MPC’s case for continuing the easing cycle in the September meeting with a third consecutive interest rate cut, this time of 150bps, bringing the policy rate down to 18%.”

Mohammed Sohail, CEO Topline Securities, also expected a rate cut of around 100-200 bps.

Abdullah Farhan, Head of Research at IGI Securities, also anticipated a rate cut of “anywhere between 150-200bps” primarily on account of recent decline in inflation.

“The overall trajectory of inflation is expected to be around 11-13% for this year,” Farhan, told Business Recorder.

“Inflation may spike by the end of this year to 13-14% owing to base effect,” he said.

The analyst projected policy rate to decline to 16% by December end.

Similarly, Ismail Iqbal Securities said real rates have remained significantly positive on a monthly basis, which gives the SBP room for a further rate cut.

“We expect the SBP to cut the rate by another 100 bps in the upcoming MPC meeting,” the brokerage house said.

Pakistan’s trade deficit shrinks marginally to $3.6bn in 2MFY25

In addition to a downward inflation trajectory, analysts believe improvement in external indicators is also strengthening the case for a rate cut.

“The current account deficit with the beginning of FY25 has substantially decreased to $162 million in July … the reduction in the deficit is largely attributed to a 48% YoY increase in remittances. This significant reduction has contributed to the stability of the PKR against the US dollar,” said AHL.

Moreover, secondary market yields for short-term government securities have declined in both primary and secondary markets.

“In the primary market, yields for the 3-, 6-, and 12-month tenors declined by 1.49%, 1.01%, and 0.74%, respectively. On the other hand, the secondary market saw an even more pronounced decline,” said AHL

“This shows the market is also anticipating further monetary easing, as reflected in the more substantial yield declines across both short- and long-term tenors in both markets,” it added.