Most analysts expect policy rate cut amid low inflation

KARACHI: The financial market is abuzz with speculation as the State Bank prepares to announce its monetary policy by the end of this month, with researchers, analysts and bankers widely anticipating a rate cut, though opinions vary on the extent of the reduction.

Given June’s inflation rate of 12.6 per cent, significantly lower than the prevailing interest rate of 20.5pc, the market expects a substantial cut.

However, a survey conducted by the brokerage house Arif Habib Limited (AHL) reveals differing expectations among stakeholders, with most expecting a cut of 100 basis points (bps).

“Our poll suggests that 55.7pc of respondents expect the SBP to reduce the policy rate, while 44.3pc anticipate the policy rate to remain unchanged,” AHL said.

Over a quarter expect reduction of 100bps, 11.5pc predict 150bps cut

“Among those expecting a rate cut, 29.5pc foresee a reduction of 100bps, 11.5pc anticipate a 150bps cut, 8.2pc expect a 200bps cut, and 6.6pc predict a cut of less than 100bps,” it said.

The survey shows that over 44pc believe the policy rate will remain unchanged, reflecting significant caution among financial experts.

A senior banker highlighted that this stance indicted the persistent political and economic uncertainties influencing the economy.

“The final IMF deal for $7 billion remains unclear, and the IMF advocates for a tight monetary policy to control the fiscal deficit,” the banker said.

AHL expects a 100bps cut, which would lower the policy rate to 19.5pc, a level not seen since March 2023.

On June 10, the State Bank announced a 150bps cut in the policy rate after inflation fell to 11.8pc, though inflation rebounded to 12.6pc the following month.

Some analysts said that June’s tax-laden budget, which is inflationary, might prompt the State Bank to proceed cautiously.

AHL noted two significant events since the last Monetary Policy Committee (MPC) meeting, including the announcement of the FY25 budget and Pakistan’s entry into a new 37-month International Monetary

Fund (IMF) Extended Fund Facility (EFF) programme worth $7 billion.

Moreover, key improvements in macroeconomic indicators of late have also bolstered expectations of a rate cut.

“First and foremost, a key factor bolstering the expectation of a rate cut is the major decline in Pakistan’s inflation rates,” the report said. “Both headline and core inflation have significantly improved.”

In addition to the improvement in the current account, the SBP’s reserves have also seen a substantial increase, the report added.

“By the end of FY24, reserves had risen to $9.4bn, up from $4.4bn a year earlier. This boost in reserves not only enhances the country’s financial stability, but also provides additional flexibility for monetary policy adjustments,” it said.

“The IMF’s staff-level agreement emphasises a commitment to supporting disinflation, which aims to protect real incomes, particularly for the most vulnerable

segments of the population. This focus aligns with our expectation of continuation of easing policy,” the AHL report added.

Published in Dawn, July 23rd, 2024