Karachi, December 15, 2024 – The State Bank of Pakistan (SBP) is set to announce its final monetary policy for the year on Monday, December 16, 2024. This SBP decision is highly anticipated, with markets forecasting a significant rate adjustment.
Market participants expect the SBP to reduce the policy rate by approximately 200 basis points (bps), driven by a sharp decline in inflation and improvements in the external sector. According to a poll conducted by Topline Securities, 71% of respondents predict a minimum rate cut of 200bps. Of these, 63% expect an exact 200bps cut, 30% foresee a 250bps cut, while 7% anticipate a reduction exceeding 250bps.
Meanwhile, 29% of respondents expect a smaller rate cut from the SBP between 50-150bps, with 69% of this group leaning towards a 150bps reduction. These expectations come amidst historically high real interest rates, which stood at 1010bps in November 2024, significantly above the historic average of 200-300bps, despite a cumulative 700bps reduction over the last four meetings since June 2024.
The remarkable drop in year-on-year inflation in recent months has bolstered expectations of a rate cut. Inflation hit a 78-month low of 4.9% in November 2024, driven by food disinflation and negative adjustments in electricity prices through Fuel Cost Adjustments (FCA). Analysts widely expect the SBP to reduce rates by 200bps, marking the fifth consecutive cut in this cycle, with the total reduction reaching 900bps. This adjustment would still leave real interest rates at 810bps, well above the historic norm.
Looking ahead, based on projected average inflation of 7-8% for FY25 and 8.5-9.5% for FY26, real rates after a 200bps cut (with a policy rate of 13%) would range between 400-550bps. Analysts maintain an interest rate target of 11-12% for December 2025, emphasizing the need for sufficient real rates to buffer against potential external or budgetary shocks.
Market trends also reflect declining inflation expectations. The 6M KIBOR and six-month Treasury bill rates have dropped 74-81bps since the last monetary policy meeting on November 4, 2024, currently standing at 12.59% and 12.16%, respectively.
In a poll conducted by Topline Research, 59% of participants forecast inflation below 8% for FY25, a sharp increase from earlier estimates. Additionally, 70% of respondents now expect interest rates to remain below 12% by June 2025, compared to just 38% in a prior survey. Falling inflation expectations, coupled with policy adjustments, signal optimism for continued economic stability.