The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) is scheduled to announce the key interest rate shortly with expectation of further rate cut of up to 200 basis points (bps).
While most see a cut of 100 basis points, there are those who expect, and hope, that the central bank would look to bring down the rate closer to the inflation rate that has gone to single digits. Improved macroeconomic indicators alongside are also putting greater hope that the market could see a greater cut than what has been the case in the previous two MPC meetings.
The policy rate currently stands at 19.5%, after a cumulative fall of 250bps since June.
Just ahead of the MPC announcement, the Karachi Interbank Offer Rate (KIBOR) also fell across all tenors.
The KIBOR rates declined across all tenors ranging from 2bps to 32bps.
“The major decrease was seen in 1-week, 2-week and 1-month KIBOR rates, with yields decreasing by 32bps, 22bps and 15bps, respectively,” said Arif Habib Limited (AHL) in a note.
“This reflects the market’s increasing anticipation of a rate cut in the monetary policy which is scheduled to take place today,” it added.
In its previous meeting held on July 29, the SBP reduced the key policy rate by 100 bps. This was the central bank’s second rate cut in the last four years.
Worryingly for the central bank, the pace of economic activity in Pakistan has decelerated in the last two years after the government implemented tough reforms under an International Monetary Fund (IMF) IMF bailout in a bid to stabilise a crumbling economy, which was on a verge of default.
However, the phase is not yet over as Islamabad has again inked a new, longer-term bailout with the Washington-based lender, after completing a short-term programme earlier this year.
In July, the IMF and the Pakistani authorities reached a staff level agreement (SLA) for a $7-billion, 37-month loan programme aimed at cementing stability and inclusive growth.
The market is currently awaiting the Executive Board approval. However, Pakistan has not yet been included on the agenda of IMF’s Executive Board calendar meetings scheduled till September 18.
Analysts’ expectations
A majority of market experts expect the SBP to continue with its easing stance as lower inflation reading boosted sentiment of a third-successive reduction.
“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.
Meanwhile, 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.
Previous MPC meeting
In its previous meeting on July 29, the MPC had cut the key interest rate by 100bps, which was in line with market expectations.
“The MPC observed that the June 2024 inflation was slightly better than anticipated. The MPC also assessed that the inflationary impact of the FY25 budgetary measures was broadly in line with earlier expectations,” the MPC had stated back then.
Since the last MPC in July, several key developments on the economic front have taken place.
The rupee depreciated a marginal 0.01%, while petrol prices increased nearly 0.4%.
Internationally, oil prices have declined significantly since the last MPC and were hovering near $70 per barrel amid lower demand.
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.
In addition, the country’s current account posted a deficit of $162 million in July 2024, an amount that is a massive 78% lower than the deficit of $741 million in the same month of the previous fiscal year.
Foreign exchange reserves held by the SBP increased by $33 million on a weekly basis, clocking in at $9.44 billion as of August 30, showed latest data.
Total liquid foreign reserves held by the country stood at $14.74 billion. Net foreign reserves held by commercial banks stood at $5.30 billion.
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