The State Bank of Pakistan (SBP) is expected to cut its key policy rate to 16% by the end of this calendar year i.e. 2024, and lower it further to 14% by end of 2025, projected BMI, a Fitch Solutions Company.
The key policy rate currently stands at 20.5%.
“We retain our view that SBP will cut its policy rate to 16.00% by the end of 2024 as we expect inflation to continue its downward trend towards the target rate of 5-7% and the rupee to remain stable throughout,” said BMI in its ‘Pakistan Country Risk Report’ published on July 15.
The research company said it had always expected the SBP would loosen policy this year, and policymakers made their first cut even earlier and more than the consensus had expected.
On June 10 2024, the SBP cut its policy rate by 150 basis points (bps) to 20.5%.
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“We expect that inflation will continue to slow over the remainder of the year,” it said.
The report noted that one of the key drivers of its recent slowdown was a sharp decline in food prices; the headline inflation slowed down more than policymakers expected, from 17.3% y-o-y in April to 11.8% in May.
“We still expect that headline inflation will continue to slow throughout the year, slipping from 11.8% in May to 6.2% in December.
“While there are risks of inflation resurging due to adjustments in electricity and gas prices, the monetary policy committee mentioned that ’cumulative impact of earlier monetary tightening is expected to keep inflationary pressure in check,” it said.
On the currency front, BMI expects that the Pakistani rupee will remain pretty stable over the remainder of the year, which will open up more space for interest rate cuts.
For the past six months, the Pakistani rupee hovered around PKR 278/USD, and we expect that the rupee will only weaken slightly over the remainder of 2024, slipping to PKR 290/USD, it noted.
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