A significant shift in economic sentiment is underway as market experts forecast a potential easing of monetary policy by the State Bank of Pakistan (SBP). The prevailing view among analysts suggests that the central bank might opt for a rate cut in its upcoming meeting, influenced by a downward trend in inflation and several positive economic developments.
Recent analysis from brokerage house Arif Habib Limited (AHL) indicates a strong expectation for the SBP to reduce the policy rate. According to AHL’s report, 55.7% of respondents in a recent poll believe the central bank will implement a rate cut. The report highlights several factors contributing to this expectation:
The Consumer Price Index (CPI) inflation rate has been on a downward trajectory, reflecting reduced inflationary pressures. pakistan’s current account deficit has improved, signaling better external financial stability. a stable currency and enhanced foreign exchange reserves further support the case for easing monetary policy.
AHL anticipates a 100 basis points (bps) cut, which would lower the policy rate to 19.5%—a level not seen since March 2023. This expectation aligns with recent macroeconomic improvements and key developments.
The government’s fiscal policies outlined in the new budget could affect monetary policy considerations. pakistan’s entry into a 37-month EFF program worth $7 billion with the International Monetary Fund (IMF) adds a layer of economic stability and support.
These developments, coupled with improved macroeconomic indicators, bolster the argument for a potential rate cut.
Another brokerage house, Topline Securities, shares a similar outlook. According to Shankar Talreja of Topline Securities, the SBP is likely to reduce the rate by 100 bps to 19.5% due to receding inflation. This forecast underscores the broader market consensus on the likelihood of a rate cut.
The previous MPC meeting on June 10, 2024, saw a 150 bps reduction in the key interest rate, bringing it down from an all-time high of 22%. This decision aligned with market expectations and was based on the assessment that underlying inflationary pressures were subsiding. The MPC cited a moderation in core inflation and improved inflation expectations among consumers and businesses as reasons for the rate cut.
The Pakistani rupee depreciated marginally by 0.02%, reflecting minor fluctuations in currency stability. There was a nearly 3% increase in petrol prices, impacting consumer costs and inflation dynamics international oil prices have remained relatively stable, hovering around $80 per barrel despite geopolitical volatility.
The CPI-based inflation rate was recorded at 12.6% year-on-year in June 2024, up from 11.8% in May. This slight increase in inflation could influence the SBP’s policy decision. pakistan’s current account deficit for FY2023-2024 was significantly lower at $681 million, a 79% reduction from the previous year’s deficit of $3.275 billion. the SBP’s foreign exchange reserves decreased by $397 million, standing at $9.02 billion as of July 19. Total liquid foreign reserves were at $14.33 billion, with commercial banks holding net reserves of $5.31 billion.
