Karachi, July 22, 2024 – As the State Bank of Pakistan’s (SBP) monetary policy meeting approaches on July 29, 2024, analysts are anticipating a significant policy shift.
Experts at Arif Habib Limited predict a potential cut of 100 basis points, which could bring the benchmark policy rate down to 19.5%, a level not seen since March 2023.
The last monetary policy announcement on June 10, 2024, was followed by two notable events: the introduction of the FY25 Budget and Pakistan’s entry into a new 37-month IMF Extended Fund Facility (EFF) program worth USD 7 billion. These developments have set the stage for potential monetary easing.
Analysts highlight several key improvements in macroeconomic indicators that support the expectation of a rate cut:
Decline in Inflation Rates One of the primary factors driving the anticipation of a rate cut is the substantial decline in Pakistan’s inflation rates. Both headline and core inflation have seen significant improvements. For FY24, the average headline inflation has dropped to 23.4% from 29.2% in the same period last year. Projections for July 2024 indicate further reduction, with inflation expected to fall to around 10.5%. This decrease would result in a real interest rate of 1,000 basis points, far surpassing the historic 10-year average of -44 basis points.
Improvement in Current Account Deficit Another critical factor is the notable improvement in Pakistan’s current account deficit, as per data released by the SBP. For FY24, the deficit has decreased to USD 681 million, marking the lowest level in 13 years. This is a significant improvement compared to the USD 3.3 billion deficit recorded in FY23. The sharp reduction has been driven primarily by a decrease in the trade deficit and an increase in remittances. This positive trend has contributed to the stabilization of the Pakistani Rupee (PKR), which appreciated modestly by 0.1% against the US dollar in FY24.
Analysts believe these macroeconomic improvements provide a strong case for the SBP to continue its monetary easing policy. A reduction in the policy rate would aim to stimulate economic activity by making borrowing cheaper for businesses and consumers, thereby fostering growth.
However, some market participants remain cautious, considering potential risks such as external economic conditions and domestic political uncertainties. The final decision by the SBP will likely weigh these factors carefully.
As the July 29 meeting date approaches, all eyes will be on the SBP to see whether it aligns with market expectations and provides the anticipated rate cut. The outcome will have significant implications for Pakistan’s economic trajectory in the coming months.