Policy Announcement: SBP May Surprise Market

State Bank of Pakistan 04

Karachi, July 27, 2024 – The State Bank of Pakistan (SBP) is poised to potentially surprise market expectations with a rate cut in its upcoming policy announcement on July 29, 2024.

While the market largely anticipates a significant reduction in the policy rate due to easing inflation, some financial experts speculate that the SBP might exceed these expectations to address the recent turmoil surrounding power bills and tax hikes.

Analysts predict that the SBP will likely reduce its key interest rate again in its first policy meeting since signing a staff-level agreement with the International Monetary Fund (IMF) and implementing a new state budget. Earlier this month, Pakistan and the IMF finalized a 37-month loan program agreement.

Stringent measures such as increased taxes on agricultural incomes and higher electricity prices have sparked concerns among low- and middle-income Pakistanis who are already grappling with rising inflation and the possibility of additional taxes.

In June, Pakistan’s central bank cut its key interest rate by 150 basis points from an all-time high of 22%, marking its first rate reduction in nearly four years. This move aimed to stimulate growth amid a notable decline in retail inflation. Inflation has since slowed, with Pakistan’s consumer price index (CPI) recording a 12.6% year-on-year increase in June, down from a peak of 38% in May 2023.

Out of 14 analysts surveyed, only one predicted that rates would remain at 20.5%, while the others forecasted a central bank cut. Seven analysts anticipated a 100 basis points cut, five expected a 150 basis points reduction, and one analyst projected a 200 basis points decrease.

In June, the central bank warned of potential inflationary effects stemming from the budget, noting that limited progress in broadening the tax base necessitated revenue increases through higher taxes.

A survey conducted by AHL revealed that the majority expect a reduction in the key policy rate during the upcoming Monetary Policy Committee (MPC) meeting. Pakistan has set an ambitious tax revenue target of Rs13 trillion ($47 billion) for the current fiscal year, which began on July 1. This target represents a nearly 40% increase from the previous year and aims to reduce the fiscal deficit to 5.9% of GDP from 7.4% in the previous year, securing crucial funding from the IMF.

An analyst highlighted that clarity on the IMF program, currency market stability, and steady foreign inflows into domestic debt and equities provide the SBP with sufficient comfort to continue easing the policy rate in July and beyond. However, Muhammad Ali, a senior investment analyst at AKD Securities, suggested that the SBP might hold rates to monitor food inflation over the next several months. “Food commodities, such as wheat, have significant upside potential,” he noted, adding that cuts of 150-200 basis points could be possible in the September and December policy meetings.