Karachi, March 12, 2024 – Analysts at Arif Habib Limited have suggested that the State Bank of Pakistan (SBP) is likely to implement a 100 basis points cut in the benchmark policy rate in the upcoming Monetary Policy Statement (MPS), reducing it to 21 percent from the existing 22 percent.
In a report released on Tuesday, analysts expressed expectations of an interest rate reversal cycle, with a keen focus on the anticipated rate cut during the March 2024 policy meeting of the SBP. The Monetary Policy Committee (MPC) is scheduled to convene on March 18, 2024, and there is a strong possibility that the SBP may initiate the interest rate reversal cycle with a 100 basis points cut in the upcoming policy.
While opinions in the market are divided, some anticipate the MPC to maintain the status quo, given that Pakistan is in the process of negotiating a new International Monetary Fund (IMF) program, and the IMF has consistently advised maintaining a tight monetary policy stance.
However, the analysts at Arif Habib Limited believe that a data-driven approach will be pivotal in the SBP’s decision-making process. The approach is likely to consider the downward trajectory of both headline and core inflation, anticipated to average approximately 17% and 15%, respectively, on a 12-month forward basis. This would result in significantly positive real interest rates on a forward-looking basis, aligning with the SBP’s previous MPS.
In the last scheduled meeting in January 2024, the SBP maintained the policy rate at 22%, citing frequent and substantial changes in regulated energy prices that hindered the expected decline in inflation. The MPC assessed that the real interest rate remains significantly positive on a 12-month forward-looking basis, expecting a continued downward trajectory in inflation.
Projections point towards a downward trajectory in headline inflation, particularly in the latter half of FY24. The average month-on-month rate is projected to be around 1.2% in 2HFY24, a decrease from the 1.6% average witnessed in 1HFY24. The estimated annual average for headline inflation in FY24 is approximately 25%, compared to 29.2% in FY23.
Several contributing factors, including the substantial base effect, stabilization of global commodity prices, support from the stability of the Pakistani Rupee (PKR) against the USD, and efforts to curtail the current account deficit, underpin these expectations.
On the external front, in 7MFY24, the Current Account Deficit (CAD) decreased by 71% YoY to USD 1.09 billion, a substantial improvement from the USD 3.8 billion deficit recorded in the same period last year. Additionally, the improvement in SBP reserves contributed to a 2.4% strengthening of the PKR against the USD, helping control imported inflation to a certain extent.
As the SBP considers potential rate cuts, these economic indicators and the overall direction of the economy will play a crucial role in shaping the central bank’s decisions and influencing the trajectory of interest rates in the coming months.
