KARACHI: The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) announced the next monetary policy on Sep 12, 2024 with expectation of further rate cut up to 150 bps.
Analysts are expecting that the committee will continue monetary easing on a lower inflation outlook and improved external account. This would be the third consecutive cut, if MPC reduced the key policy rate as the committee has lowered the policy rate by 150bps on Jun 26, 2020 and 100bps on Jul 29, 2024.
In a poll conducted by Topline Securities, 98 percent of the participants believed that State Bank would announce a rate cut. Out of 98 percent, 85 percent are expecting more than 150bps cut while 15 percent are expecting a cut between 50-100bps.
According to Topline, larger rate cut expectations in upcoming monetary policy meetings are driven by single digit inflation reading of Aug 2024 at 9.6 percent, which is expected to continue in Sep 2024 as well.
“We are also of the similar view that SBP will announce a rate cut to the extent of 150bps compared to the cut of 100bps in the last monetary policy meeting,” Analysts at Topline projected.
Post expected rate cut of 150bps, real interest rates will remain at +840bps, still higher than Pakistan’s historic average of 200-300bps.
They said that led by falling inflation expectations, the 6M KIBOR and treasury bills rate are down 156-163bps since the last monetary policy meeting on Jul 29, 2024 and currently hovering at 17.82 percent and 17.49 percent, respectively. This suggests market participants are also expecting a similar rate cut in the upcoming meeting.
Analysts are expecting that policy rate to come down to 14-15 percent in FY25.
Analysts at AHL Research also anticipate a 150bps cut, bringing the policy rate down to 18 percent, a level last seen in Feb’23. This would mark the third consecutive rate cut since the commencement of the interest rate reversal cycle in Jun ‘24.
There are some key recent improvements in macroeconomic indicators that support expectation of a rate cut.
The main factor supporting anticipated rate cut is the significant decline in inflation to single digit. Additionally, both headline and core inflation rates in Pakistan have decreased. For the 2MFY25, the average inflation rate is 10.4 percent, a substantial drop from 27.8 percent in the same period of FY24.
Furthermore, on the external front, the current account deficit with the beginning of FY25 has substantially decreased to $ 162 million in Jul ‘25 compared to the $741 million deficit recorded in the same period last year. The reduction in the deficit is largely attributed to a 48 percent YoY increase in the home remittances. This significant reduction has contributed to the stability of the PKR against the US dollar.
Additionally, AHL Research mentioned that the Large Scale Manufacturing Index (LSMI) has shown slightly improved performance. For FY24, LSMI reported a 0.94 percent YoY increase in production, with positive growth observed in ten sectors, including food, coke and petroleum products, clothing, and pharmaceuticals.
Copyright Business Recorder, 2024
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