Karachi, July 24, 2024 – A recent survey conducted by Topline Securities Limited indicates a strong likelihood that the State Bank of Pakistan (SBP) will reduce its benchmark interest rate to 19.5%, down from the current 20.5%. This anticipated decision will be formally deliberated during the SBP’s Monetary Policy Committee (MPC) meeting scheduled for July 29, 2024.
The survey revealed that 75% of market participants predict a rate cut, with 60% expecting a reduction of 100 basis points (bps). Analysts at Topline Securities Limited concur with this sentiment, forecasting a 100bps decrease in response to easing inflationary pressures. “We estimate inflation to clock in at 11% in July 2024,” the analysts projected.
The rationale behind this potential rate cut lies in the substantial real interest rate buffer, which stands at approximately 790bps based on June 2024 inflation figures of 12.6% and is expected to be around 850bps given the July 2024 inflation forecast of 11%. This buffer, significantly above the historical average of 200-300bps, provides the SBP with ample leeway to counteract any external shocks or delayed impacts of budgetary measures.
Supporting this expectation, the 6-month Karachi Interbank Offered Rate (KIBOR) and Treasury bill rates have both decreased by 83-84bps since the last MPC meeting on June 10, 2024, now hovering at 19.84% and 19.52%, respectively. This downward trend in short-term rates signals market anticipation of an impending policy rate cut.
Key insights from the SBP’s recent analyst briefing underscore that any further reductions in the policy rate will hinge on the assessment of post-budgetary and International Monetary Fund (IMF) measures. Should the SBP proceed with the rate cut, it would mark the second consecutive reduction following the previous 150bps decrease in the June 2024 meeting, which was the first cut in four years since June 26, 2020.
Looking ahead, Topline Securities analysts anticipate a cumulative decline in the policy rate by 450-550bps by June 2025, potentially bringing it down to 15-16%. This projection is predicated on an expected inflation average of 13-13.5% for FY25, maintaining a real interest rate buffer of 300-400bps.
The prospective interest rate adjustment is set against a backdrop of declining inflation expectations, which have already influenced market rates. The anticipated rate cut is seen as a strategic move to stimulate economic activity while maintaining sufficient safeguards against inflationary and external pressures.
As the MPC meeting approaches, all eyes will be on the SBP’s decision, which holds significant implications for the country’s economic trajectory. Stakeholders in the financial and business sectors are advised to stay informed and prepare for the potential impacts of this policy shift.