PkRevenue.com – Analysts at Arif Habib Limited on Friday projected a significant policy rate cut by the State Bank of Pakistan (SBP) in its upcoming monetary policy announcement scheduled for June 10, 2024. The market is anticipating a 2% reduction, bringing the policy rate down to 20%, a level last seen in March-April 2023.
The analysts highlighted that market expectations are mounting for the initiation of a rate cut cycle. “We are expecting a reduction of 200 basis points in the policy rate, potentially lowering it to 20%,” they stated. This forecast is underpinned by several favorable economic indicators, suggesting a conducive environment for a reversal in the monetary stance.
One of the primary factors supporting the market expectation of a rate cut is the downward trajectory of inflation in Pakistan. Both headline and core inflation figures have shown significant improvement. The average headline inflation for the first ten months of the fiscal year 2024 (10MFY24) has decreased to 25.97%, down from 28.23% during the corresponding period last year. For May 2024, inflation is anticipated to further decline to 13%, resulting in a real interest rate of 900 basis points—substantially higher than the historic 10-year average of negative 44 basis points.
On the external front, the current account deficit has shown remarkable improvement during 10MFY24, narrowing by 95% to USD 202 million. This significant reduction has contributed to the stability of the Pakistani rupee (PKR) against the US dollar, bolstering economic confidence.
The International Monetary Fund (IMF), in its recent country report, acknowledged these positive economic developments but emphasized the importance of maintaining a tight monetary policy to ensure continued stability. However, the IMF also suggested that the stance could be reassessed if Pakistan’s inflation continues to decrease and improvements in the foreign exchange market persist.
Even with a potential rate cut of 200 basis points, Pakistan would still align with the IMF’s stance on maintaining a relatively tight monetary policy. Given the improvements in inflation and the external account, it is plausible to foresee an easing in the monetary policy framework.
The anticipated rate cut would not only support economic growth but also align with the evolving economic conditions. Analysts believe that this move would help stimulate economic activity by reducing borrowing costs, thus encouraging investment and consumption.
As the monetary policy announcement approaches, all eyes are on the SBP to see if it will initiate the much-anticipated rate cut, setting the stage for a new phase of economic growth and stability in Pakistan.
