Start of monetary easing: experts weigh in on SBP’s decision to cut key policy rate

In its first cut in four years, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) on Monday announced a policy rate reduction of 150 basis points, taking it to 20.5%.

The announcement, which comes just a couple of days ahead of the budget announcement, was in line with market expectations, analysts who largely expected a decline of 100-200 bps told media.

The central bank’s decision to initiate monetary easing comes after CPI inflation simmered down to 11.8% in May, significantly lower from a historic high of 38% last year during the same month. Moreover, several central banks around the world including the Bank of Canada, Bank of England have already initiated rate cuts.

“It was about time,” Sana Tawfik, Head of Research at Arif Habib Limited (AHL), a brokerage house that had earlier projected a rate cut of 200bps, told media.

The analyst was of the view that the decision would be positive for the cement, power, textile, chemical and auto sectors.

Meanwhile, Mustafa Pasha, chief investment officer at Lakson Investments, said he believed the impact on markets in the near term is expected to be muted.

“In terms of future policy expectations, we expect the SBP to pursue aggressive cuts in September’s MPC, and by year-end, the policy rate is expected to lower down to 16-17%,” he said.

“At present, the central bank has a good balance, in terms of stable currency, positive current account and lower inflation. Going forward, we expect a rate cut by 4-5% by the end of this year,” he said.

Economic activity has been slow in the South Asian country for the last two years after the government implemented tough reforms under an International Monetary Fund (IMF) bailout in a bid to stabilise a crumbling economy.

However, the phase is not yet over as Islamabad is again in talks with the IMF for a new longer-term bailout.

The global lender has long been an advocate of a tight monetary stance, and has linked any loosening of the policy stance to be supported by further evidence that “inflation remains on a declining trend, pass-through remains contained, and possible exchange rate pressures from FX market normalization are limited.”