Another significant cut in key policy rate expected as inflation eases

The State Bank of Pakistan (SBP) is seen further reducing the key policy rate by at least 200 basis points (bps) in line with the slowing pace of inflation and improved economic indicators, a brokerage house survey stated.

The survey found that 71% of the participants expected that the central bank will announce a minimum rate cut of 200bps, Topline Securities said on Tuesday. Among them, “63% expect the interest rate to be cut by 200bps, 30% expect a cut of 250bps, and 7% anticipate a cut of more than 250bps”.

The remaining 29% expect a rate cut between 50-150bps, said the brokerage house.

Finance ministry expects another policy rate cut as inflation comes down

In the previous meeting, the Monetary Policy Committee (MPC) of the SBP reduced the key interest rate by 250 basis points (bps), its most aggressive cut in history that took the rate from 17.5% to 15% after a fourth successive round of monetary easing that began in June 2024.

The MPC is now scheduled to meet on December 16, 2024.

Topline Securities was of the view that the expectations of a rate-cut are driven by high real rates, which stood at 1010bps in November 2024, well above the historic average of 200-300bps.

This is despite a cumulative 700bps cut in total interest rates in the last four consecutive meetings since Jun 2024, it said.

The brokerage house highlighted that real rates are high as the monthly inflation reading for November 2024 has dropped to a 78-month low of 4.9%.

“Significant fall in YoY inflation in last few months is on the back of faster food disinflation and negative electricity prices adjustments (FCA),” it said.

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“We also hold the view that the SBP will announce a rate cut of 200bps, taking the total cut to 900bps,” it said, marking the 5th consecutive cut of this easing cycle.

However, despite the rate cut of 200bps, real interest rates will remain at 810bps, “still higher than Pakistan’s historic average of 200-300bps”, it said.

“However, based on average inflation of 7-8% for FY25 and 8.5-9.5% for FY26, real rates after this 200 rate cut (policy rate 13%) would be 400-550bps,” Topline stated.

The KSE-100 Index has also been expecting a significant cut in the key policy rate, and been on an upward trajectory since the protests in Islamabad ended.

On Tuesday, the benchmark index crossed 104,000 for the first time after ending with a gain of 1.26%.