A recent survey conducted by Topline Securities Limited indicates that market participants widely anticipate a 100 basis points (bps) reduction in the benchmark policy rate during the upcoming Monetary Policy Committee (MPC) meeting. The State Bank of Pakistan (SBP) is set to convene this crucial meeting on January 27, 2025.
According to the survey, 61% of respondents predict that the SBP will announce a 100bps rate cut. Among the remainder, 7% foresee a 50bps cut, 7% expect a 150bps reduction, 17% anticipate a 200bps cut, 2% predict a 250bps cut, and 6% believe there will be no change in the policy rate.
Analysts at Topline Securities attribute these expectations to the exceptionally high real interest rates, which currently stand at approximately 950bps in January 2025, significantly above the historical average of 200-300bps. This is despite the SBP implementing a cumulative 900bps reduction in the policy rate across five consecutive meetings since June 2024.
The high real rates are supported by a substantial decline in inflation, which is projected to reach 3.5% in January 2025—the lowest level in 103 months. This drop in year-on-year inflation is primarily driven by food price deflation and negative adjustments in electricity tariffs under the Fuel Cost Adjustment (FCA) mechanism.
Analysts believe the SBP will likely announce a 100bps rate cut, marking the sixth consecutive reduction in this cycle and bringing the total reduction to 1000bps. Even after this adjustment, real interest rates would remain elevated at 850bps, well above Pakistan’s historical average. The SBP’s policy approach aims to maintain sufficient positive real rates to cushion potential external or fiscal shocks, including gas price hikes, fuel price adjustments, and mini-budget impacts.
The SBP Governor recently suggested that average inflation for FY25 would likely fall below the previously forecasted range of 11.5-13.5%, with updated projections expected in the January 2025 MPC meeting. Analysts estimate inflation will average between 6.5-7.5% in FY25 and 8.5-9.5% in FY26.
The survey also revealed that 56% of respondents expect inflation to remain below 8% for FY25, slightly lower than a prior estimate of 59%. Additionally, 94% of participants anticipate interest rates to fall below 12% by December 2025, with 82% projecting rates between 10-12% by mid-2025. The SBP’s proactive policy adjustments have also contributed to declines in 6M KIBOR and Treasury bill rates, which have decreased by 23-32bps since the last MPC meeting in December 2024.